Planned changes to non-dom tax laws mean you should review your arrangements now

02/05/2024
By David Snelling

In last month’s newsletter we wrote about 5 big changes for returning expats and non-doms from the UK 2024 Budget in the aftermath of the chancellor’s statement.

In it we referred to a specific “window of opportunity” that the changes regarding non-doms and Inheritance Tax (IHT) could affect you and your financial planning arrangements if you are planning to return to the UK in the future.

This window referred to the use of Excluded Property Trusts (EPTs) to protect some of your financial assets from IHT liability, because the implications of the Budget was that the use of EPTs in this way will not be possible after 5 April 2025.

Indeed, recent events suggest the window we referred to may be closing sooner than we originally thought.

So read on to find out more about the effect of the changes announced and why you need to review your tax arrangements as a matter of some urgency.

What the Budget confirmed

You can read a detailed summary of what the chancellor announced in his Budget in respect of non-doms and returning expats in the article we published last month.

However, the four key points you should note are:

  1. The remittance basis of taxation will be abolished from 6 April 2025.
  2. The concept of domicile for UK Income Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT) will also be abolished from the same date.
  3. In place of the current non-domiciled regime, there will be an exemption regime based on residence and available to qualifying arrivals coming into the UK.
  4. Liability to IHT will also be determined by residence, with worldwide assets becoming subject to that tax where the individual has been resident in the UK for 10 tax years, and for a further 10 years after they cease to be UK resident.

Note, however, that all these points are subject to legislation and, in the specific case of IHT, a consultation period.

Excluded property trusts have previously been used to mitigate against Inheritance Tax

EPTs have often been used by non-doms based overseas who are ultimately planning to move to the UK. We have previously written an article about how you can use one to reduce your IHT liability, that you may find informative.

If either you or your spouse has never been UK-domiciled or were not born in the UK, you have been able to use an EPT to put non-UK assets in trust.

On any eventual move to the UK, those assets will sit outside your estate for IHT purposes. As you can appreciate, this has often resulted in a substantial tax saving for the beneficiaries of IHT liable estates.

It has also been possible for you, as a non-dom living in the UK, to make use of this trust option to mitigate any future IHT liability on the value of your estate.

Through effective use of an EPT in this way, it has been possible to dramatically reduce the potential IHT liability on your overall estate if you return to the UK to spend your retirement years here.

The Budget has removed the protection provided by excluded trusts

It became clear after the implications of the Budget were properly analysed, that this trust regime will no longer apply after the end of the current 2024/25 tax year.

Such offshore trusts, created after 5 April 2025, will not qualify for protection.

Under the Budget proposals, offshore trusts settled by non-doms prior to 6 April 2025 will retain their “excluded property” status for IHT purposes, meaning that non-UK assets in the trust will continue to sit outside the value of your estate.

There are signs that a Labour government will further remove non-dom trust exemptions

It’s important to note that, at the time of writing, the draft legislation relating to the Budget proposals has not yet been published. Sometimes what actually gets published and ultimately becomes law is not necessarily what was in the chancellors red box on Budget day.

Should they win the next election, an incoming Labour government will face big economic challenges, particularly when it comes to raising money to support key public services such as education and the NHS.

The Guardian report that the shadow chancellor, Rachel Reeves, is looking to raise £2.6 billion over the course of the next parliament by closing what she described as loopholes in the plans announced to abolish exemptions for non-doms.

She has confirmed that the next government will look to prohibit the use of trusts to avoid IHT. Furthermore, a report by KPMG suggests that this could include all foreign assets held in a trust within the scope of UK IHT, whenever they were set up.

Incoming governments of a new political leaning tend to look to act quickly to put their financial plans into effect.

For example, chancellor George Osborne confirmed his post-financial crash austerity measures in an emergency Budget within seven weeks of the new coalition government being formed after the May 2010 election.

It’s likely that an incoming Labour chancellor would look to follow a similar timescale.

So, not only do many questions still remain after the Spring Budget, with the resulting uncertainty this can create when it comes to your tax planning, the Labour response has accentuated that uncertainty. It could potentially limit the length of the window of opportunity you’ve read about, or remove it completely.

It would be wise to review your IHT planning arrangements

As you have probably realised by now, the Budget announcement and Labour Party response make it imperative for you to review your trust and inheritance planning arrangements.

I’d go so far as to say that you should be making this one of your financial planning priorities.

In matters like this, I will also recommend that you are on the front foot and remain proactive rather than simply reacting to events as they happen.

Exactly what you can and should do will obviously 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 to help protect your assets. I would just say that you ought to be getting expert advice as soon as possible.

Get in touch

If you would like to talk about the details in this article, and how you could be affected, then please get in touch.

You can 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.

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