Dion Angove, Financial Planning Market Development Manager at SJB Global, looks at what British expats need to know about the 2025 UK inheritance tax changes.
Welcome! Today, we’re diving into the thrilling world of tax law, specifically focusing on the ever-so-captivating subjects of residence and domicile. Now, you might think, ‘Oh joy, taxes!’ But fear not, I promise to make this as painless as possible—no number-crunching headaches here! Think of residence as where you hang your hat and domicile as where you might have left your heart—perhaps alongside some lovely fish and chips back in the UK. So, grab a cup of tea (or café con leche) and let’s sort through this together, hopefully without needing to decipher any legal jargon that sounds like it came straight out of a Charles Dickens novel!
Residence
Residence refers to the place where you currently live—essentially, where you have your main home. This is usually straightforward to determine; for example, if you spend most of your time and carry out your daily activities in Spain, then Spain is your place of residence. Your residence often dictates where you are liable to pay taxes based on the amount of time you spend there each year.
Domicile
Domicile, on the other hand, is more about your permanent home and is usually tied to a place you intend to return to and remain in indefinitely. It’s often the country where you were born and can continue to be your domicile even if you live abroad for many years. For example, if you were born in the UK and have substantial connections there, the UK may still be considered your domicile despite living in Spain. Domicile is particularly important for legal matters, such as inheritance, and can affect your tax responsibilities, especially for estate taxes or inheritance tax.
The UK government has announced significant changes to its tax regime that will impact non-UK domiciled individuals from April 2025, particularly concerning Inheritance Tax (IHT) and domicile status. Here’s a breakdown of these important updates:
Shift to Residence-Based Inheritance Tax
The new rules, starting in 2025, transition Inheritance Tax from being based on domicile to being based on residence. Under this new system, only those who have been UK residents for at least 10 years will see their non-UK assets included in their UK IHT assessments. This change aims to simplify the tax system and could lower the IHT burden for UK expats who do not meet this residency threshold.
Ending the Remittance Basis
The remittance basis of taxation, which allowed non-doms to pay no UK tax on foreign income unless it was brought into the UK, will end on 6 April 2025. Non-domiciled residents will then be taxed on their worldwide income and gains from when they start residing in the UK, although there will be special rules for the first four tax years of residency.
Transitional Provisions
Transitional measures will be introduced to ease into the new system. These include a temporary repatriation facility, allowing foreign income and gains up to the 2024/25 tax year to be remitted to the UK and taxed at a reduced rate of 12% for two years starting from 6 April 2025. Individuals will also have the option to rebase the value of foreign capital assets to their value on 5 April 2019 for disposals post-6 April 2025.
Changes to Trusts
The upcoming reforms will affect trusts as well, particularly those established by non-doms. From 6 April 2025, foreign income and gains arising within non-UK trusts will be taxed annually on UK resident settlers. This aligns the treatment of non-UK domiciled settlors with UK domiciled ones, thus removing some advantages previously available under the remittance basis.
These changes aim to make the UK tax system simpler and fairer by treating all residents equally, regardless of their domicile status. They represent a significant shift intended to make the system less attractive for tax planning based on domicile status and more equitable for those contributing to the UK economy. If these changes affect you, it would be prudent to consult with a tax advisor to understand how these changes could impact your personal situation, especially if you have relied on the remittance basis or have assets in trusts.
That’s a wrap on our journey through the upcoming changes in UK Inheritance Tax. I hope this explanation has shed some light on the subject, much like a break in the clouds on a typical British day. Remember, navigating these tax changes doesn’t have to be as daunting as it sounds. If you have any more questions or need some guidance, feel free to reach out. Until next time, keep your tea warm and your financial plans cooler. Take care!