The recent Budget was one of the most long-awaited in years. Indeed, there was a gap of over 100 days between Labour winning the general election in July, and the new chancellor, Rachel Reeves, delivering her first Budget on 30 October.
You may have already read our immediate post-Budget update that gave a high-level overview of the background to the statement and a summary of the key changes.
Now that the dust has settled, read our more considered analysis of some of the key issues, particularly those affecting high net worth individuals and expats.
Long-term British expats will no longer need to fear Inheritance Tax on non-UK assets
The previous government set the ball rolling concerning changes to non-dom status in the March 2024 Budget, by confirming the introduction of a new Inheritance Tax (IHT) regime based on residency rather than domicile.
Following those initial proposals, the chancellor announced that the current regime will be scrapped from 6 April 2025.
It has been announced that your non-UK estate will only be subject to UK IHT after you become a “long-term resident”, meaning you have been a UK resident for 10 or more of the previous 20 tax years.
This means that as a British expat who has lived outside of the UK for many years, you will no longer need to fear the risk of HMRC still considering you being UK domiciled. In fact, the new rules will even give you the flexibility to return to the UK for a significant period without the current IHT implications that exist.
However, it’s worth noting that the changes mean that this will not include any UK residential property and potentially your accrued UK pension funds.
The downside to this is that, as a non-dom, you may have offshore assets that will become liable for IHT after 10 years of residency, whereas the current “deemed domicile” provisions capture assets after 15 years of residency.
Long-term British expats can repatriate and avoid paying UK tax for up to 4 tax years
The changes will result in a new four-year foreign income and gains (FIG) regime for individuals who return to the UK from places like Hong Kong after a period of at least 10 consecutive tax years of non-UK residence.
This could mean that as a British expat, you could spend your first four years of living back in the UK enjoying tax-free investment income and gains from your offshore investment portfolio. That income can even be remitted back into the UK free of tax.
Additionally, Overseas Workday Relief is now available to anyone UK domiciled for the first four years of residency in respect of duties performed overseas, whereas previously this was only available to non-doms for a period of three years.
For example, as a British expat you might return to live in the UK but undertake several business trips back out to Hong Kong. Any income arising from those overseas duties will not be subject to UK tax, although there are a couple of proposed limits. Like FIG, such income could also be brought back into the UK tax free.
The FIG regime will bring about an end to the remittance basis of taxation for non-doms. As a short-term mitigation measure, the chancellor announced the introduction of a new Temporary Repatriation Facility. This will enable you to designate amounts from before April 2025 that would have previously been taxed on the remittance basis and pay a reduced tax rate for a period of three tax years, starting from the 2025/26 tax year.
One downside of this for non-doms is a significant shortening of the period of which you can avoid UK tax on offshore FIG, but on the upside, the first four years of FIG can be remitted.
Your UK pensions will now be subject to Inheritance Tax
Your accrued UK pension funds do not currently form part of your estate for IHT purposes. This is a significant tax benefit that I know many of you have taken advantage of as part of your estate planning arrangements.
However, the chancellor confirmed that this exemption will end in April 2027.
In addition, overseas arrangements such as Recognised Overseas Pension Schemes (ROPS) and Qualifying Non-UK Pension Schemes (QNUPS) will also be captured.
This means that any previous advice to preserve pensions to minimise your IHT liability could now change to a scenario where you use your pension to provide income ahead of other potential tax-efficient sources such as ISAs.
In addition, the beneficiaries who inherit your pension are expected to pay marginal rates of Income Tax (up to 45%) on drawing down on such pensions, regardless of your age at death.
Previously, this was only the case where the pension member died on or after their 75th birthday. This tax treatment seems particularly harsh, and we are hoping that this might be reconsidered during the industry consultations that will follow.
We are also waiting for confirmation as to whether non-residents will be subject to tax on UK pension funds.
Excluded Property Trusts may now become Relevant Property Trusts
The move to a residence-based system as the determining factor for IHT liability will result in the status of a trust being determined by the long-term resident status of the settlor.
This will erode the effectiveness of Excluded Property Trusts (EPTs) as a IHT mitigation strategy.
Any previous EPTs that were settled before 30th October 2024 held by trustees will become “relevant property” dependent on the settlor’s status, rather than the status at the time of the settlement.
Specifically, a trust will move from excluded property status to relevant property status when the settlor becomes a long-term resident, having been UK resident for 10 or more of the previous 20 tax years.
We understand that such trusts will not be subject to IHT but will be liable for 10-year anniversary charges of up to 6% as well as exit charges.
The same will apply to EPTs set up after 30 October 2024, but only if the settlor is excluded as a beneficiary of the trust. If the beneficiary is not excluded, once the trust moves from excluded property status to relevant property status, it will be liable not only for the periodic charges and exit charges, but also 40% IHT on death due to gift with reservation of benefit rules.
The scope of the Budget changes means that we would strongly recommend you review your financial arrangements
I wrote in a previous article concerning the planned changes to non-dom status that you should review your arrangements, and the recent announcements in the Budget make that all the more imperative.
Indeed, given what the chancellor announced, along with the other changes to pensions and IHT, I would venture to suggest that reviewing your financial and estate planning arrangements should be a top priority.
Exactly what you can and should do will depend on your future plans and financial intentions. There’s no easy “one-size-fits-all” solution when it comes to the steps you should take to protect your assets. I would just say that you ought to be seeking expert advice as soon as possible.
There are still very legitimate and effective ways to mitigate the most challenging effects of the upcoming changes to non-dom status.
While most of the changes announced will not come into effect until 6 April 2025, we would strongly recommend that you seek advice from a financial planning and tax expert as soon as possible.
Get in touch
If you would like to talk about how the Budget changes could affect you personally, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Please note
This article is for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
While we believe this interpretation to be correct, it cannot be guaranteed, and we cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained within this summary.
We would strongly recommend you get expert professional advice before entering into or altering any new arrangement.
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