After much media speculation about the abolishment of UK Inheritance Tax in recent months, it is fair to say that many advisers across the Private Wealth industry were caught off-guard by the Spring Budget.

The Chancellor, Jeremy Hunt, delivered the news that the UK’s taxation regime for UK resident non-domiciled individuals (non-doms) is to be abolished with effect from 6 April 2025, and replaced with a system that is, in his words at least, “simpler and fairer”.

The proposed changes are broad in scope, and impact various taxes. Whilst this article is not intended to be an exhaustive summary and is based on our understanding of the proposed legislation, there are some key takeaways from an Inheritance Tax planning perspective.

It is important to note that some of the proposals mentioned in this article remain subject to a consultation period, and the outcome of the general election may also result in amendments to the proposals if the Labour party are successful.

For clients wishing to plan ahead, insurance solutions can be considered.

Shifting to a residence-based system

Currently, all personally owned UK assets are within the scope of Inheritance Tax regardless of an individual’s domicile (or residence). For example, a UK residential property or funds held in a UK bank account. This will remain unchanged.

However, for personally owned non-UK assets, under current legislation, an individual’s domicile position determines whether they are within the scope of Inheritance Tax. Broadly speaking, if an individual is not UK domiciled nor deemed domiciled, they are only subject to Inheritance Tax on their UK assets.

In contrast, if an individual is either UK domiciled or deemed domiciled (as a result of residing in the UK for 15 out of 20 tax years), they are subject to Inheritance Tax on their worldwide assets.

In all cases, Inheritance Tax is charged at a rate of 40% on death (subject to the availability of any reliefs or allowances). This will also remain unchanged.

From 6 April 2025, the intention is to move to a residence-based system instead.

Individuals will only be subject to Inheritance Tax on their UK assets for their first 10 years of being UK tax resident (provided they have been non-UK tax resident for at least 10 years before that). After 10 years they will be subject to Inheritance Tax on their worldwide assets.

Compounding this shorter timeframe, where individuals are leaving the UK following 10 years of being UK tax resident, they will have a ‘10-year tail’ i.e. their worldwide assets will remain subject to Inheritance Tax for a further 10 years whilst they are non-UK tax resident.

Individuals with a UK domicile that have been living outside of the UK for an extended period stand to benefit most from the new residence-based system. Whereas under current legislation, shaking one’s UK domicile is not an easy task (to say the least), such individuals will have greater certainty around their Inheritance Tax exposure on non-UK assets going forward.

Protected trusts

Currently, non-doms can shelter their non-UK assets from Inheritance Tax indefinitely by settling these assets in a trust prior to becoming deemed domiciled.

For non-doms with such an existing trust, or where they establish such a trust prior to 6 April 2025, the good news is that the Inheritance Tax treatment will not change under the new proposals i.e. any non-UK assets held in such trusts will not be exposed to Inheritance Tax.

However, from 6 April 2025, the Inheritance Tax position on non-UK assets settled in newly established trusts will be determined by the settlor’s residence position. Whilst still subject to consultation, this could mean that that a trust established after 6 April 2025, and non-UK assets held within it, are subject to the same tax regime as UK discretionary trusts, with the potential for 10-yearly periodic charges and exit charges to arise in future years.

As a result, from 6 April 2025, this common method of planning for non-doms may be much less attractive, and a thorough cost-benefit analysis must be undertaken alongside the consideration of other potential solutions for mitigating exposure to Inheritance Tax on non-UK assets.

Planning options

Based on the proposals outlined in the budget, non-doms will be considering their position carefully, and no doubt making plans to leave the UK and/or settle their non-UK assets in a trust prior to 6 April 2025.

Additionally, individuals that were considering a move to the UK could look at alternative regimes that may provide more favourable tax treatment. For example, Italy’s non-domiciled regime allows individuals who have not been tax resident in Italy for at least 9 of the previous 10 years, to pay a flat fee of €100,000 per year and benefit from an exemption from Italian inheritance and gift tax for up to 15 years.

That said, before rushing to any planning decisions, all non-doms will be well-advised to explore the availability of insurance solutions that can protect an exposure to Inheritance Tax on their non-UK assets.

Insurance solutions

Example one

Francis and Lara are married and both age 55. They both became UK tax resident in the tax year 2012/13. They enjoy living in the UK, and their two adult children and three grandchildren also currently live in the UK. They had planned to remain in the UK until 2027 before moving to sunnier climes.

Between them, they own non-UK assets in their personal names currently valued at GBP 55 million. They also own a UK residential property currently valued at GBP 5 million i.e. total assets worldwide of GBP 60 million.

Following the budget announcements, they are considering their position in the UK, as they are concerned about their non-UK assets being exposed to Inheritance Tax from 6 April 2025 and the ‘10-year tail’. Based on current values, their worldwide asset base will be exposed to Inheritance Tax of GBP 24 million (40% of GBP 60 million) should both of their deaths occur.

They have spoken with their lawyer and tax adviser. Whilst leaving the UK prior to 6 April 2025 is an option, they do not wish to upset their original plans to remain in the UK for a few more years as they are helping with childcare for their youngest grandchild. Furthermore, they do not wish to establish a non-UK trust, as this seems complicated and costly, particularly as they only planned to live in the UK until 2027.

As an alternative, they choose to explore an insurance solution that could protect the Inheritance Tax exposure from 6 April 2025 until such time that they lose the ‘10-year tail’ in approximately 2037.

On the assumption that they are both accepted on standard non-smoker medical underwriting terms, the indicative premium for an insurance solution that will pay out if they both die is:

* A cover amount of GBP 24 million will protect Inheritance Tax on assets valued at GBP 60 million, ignoring reliefs or allowances.

The 20-year policy term will provide Francis and Lara with the flexibility to remain in the UK for longer than intended. Equally, should they lose their ’10-year tail’ prior to the end of the policy term, they can cancel the policy early, without penalty.

Should they also wish to protect against future growth in the value of their assets, it may be possible to over-insure the Inheritance Tax exposure from outset, subject to agreement from the insurer.

Example two

Sally, age 35, and James, age 48, are married. Sally has lived in the UK since birth, but James grew up in Australia, and became UK tax resident in the tax year 2015/16. They have two young children in full-time education.

Prior to moving to the UK, James had built up significant wealth outside the UK from two successful tech business ventures which he subsequently sold. He currently has residential property assets outside the UK totalling GBP 50 million. He has since gone on to set up another business in the UK, and currently earns an income of GBP 3 million per annum from a combination of salary and dividends which are taxable in the UK.

Sally and James have previously discussed their future residency plans, and they decided to remain in the UK until their two children have completed their A-Levels in 2035. However, from 6 April 2025, under the new proposed residence-based system, all of James’s wealth outside the UK will be exposed to Inheritance Tax of GBP 20 million (40% of GBP 50 million). Furthermore, he will need to spend a minimum of 10 years outside the UK to remove this exposure.

James chooses to explore an insurance solution that could protect the Inheritance Tax exposure from 6 April 2025 until he loses the ‘10-year tail’. Furthermore, he would like to ensure that there is adequate liquidity in place for his family in the event of his premature death.

On the assumption that James is accepted on standard non-smoker medical underwriting terms, the indicative premium for an insurance solution that will pay out in the event of his sole death is:

* A cover amount of GBP 30 million will protect Inheritance Tax on assets valued at GBP 75 million, ignoring reliefs or allowances.

The 30-year policy term will provide James with an adequate time horizon to remain in the UK until 2035 and shake the ‘10-year tail’ thereafter. Equally, should he lose the ’10-year tail’ prior to the end of the policy term, he can cancel the policy early, without penalty.

In addition to protecting the Inheritance Tax exposure on non-UK assets, the cover amount of GBP 30 million will provide a surplus to ensure that his family have access to adequate liquidity in the event of his premature death.

Next steps

If you would like to discuss any of these issues or understand how insurance solutions may help you or your clients to prepare for the incoming changes, please get in touch.

This article is intended as a general summary of some of the proposals announced in the recent budget, and insurance solutions that may be appropriate for clients to consider. It should not replace tax, legal or financial advice tailored to an individual’s specific circumstances. The indicative premiums quoted in this article are correct as of 10 March 2024.