UK Budget 2024— Changes to Domicile
One significant announcement in the Spring Budget 2024 was the abolition of the concept of domicile—a regime that dates back 200 years and allows people to be domiciled abroad to pay tax on their UK income and capital gains only.
Under current Inheritance Tax (IHT) legislation, a UK-domiciled individual is subject to IHT on the value of their worldwide estate. An individual who is a non-UK domiciled individual is only subject to IHT on any UK-situs assets.
Once a non-UK-domiciled individual has been resident in the UK for 15 out of the previous 20 tax years, they would be treated as being deemed UK-domiciled and subject to IHT in the same way as an individual who is UK-domiciled.
Changes to the concept of domicile could end the planning opportunities currently available for a non-UK-domiciled individual looking to mitigate UK inheritance tax. However, there is still a short window available for individuals who want to plan ahead.
Changes to Domicile Rules
The UK government has announced that the concept of domicile is outdated and will be changed to a regime that is based on residence. Although the proposed change will initially only impact foreign income and gains, the intention is for IHT also to be moved to a residence-based regime.
In relation to IHT, it is envisaged that an individual who has been a UK resident for ten years would be taxable on their worldwide estate.
Current IHT Planning
Currently, a non-UK-domiciled individual is able to settle non-UK assets into a trust (known as an Excluded Property Trust [EPT]). Should an individual later become deemed UK-domiciled (and subject to IHT on their world estate), the assets within the EPT would be treated as excluded property and outside of the scope of IHT.
What Have the UK Government Confirmed?
To provide certainty to the taxpayer, the current UK government have confirmed that the treatment of non-UK assets settled into an EPT by a non-UK domicile individual before April 2025 will not change.
This means that where non-UK assets are settled into an EPT (before April 2025) by a non-UK domiciled settlor, they will be treated as excluded property once the residence-based regime is introduced. However, assets settled after April 2025 will be subject to the new residence-based rules and within the scope of IHT.
Planning Opportunities
With the current government confirming that IHT protections will be maintained for assets settled into an EPT before April 2025 by someone who is or may in the future be a UK resident, individuals only have 12 months to act. This is only possible where they are not currently deemed UK domiciled or have not acquired a UK domicile of choice.
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