Expats given boost from major inheritance tax break

TENS of thousands of British expatriates could have their inheritance tax bills cut under government plans to reform the non-dom regime.

As part of a swathe of reforms to the current tax rules, the estates of Britons living abroad may no longer be charged UK inheritance tax (IHT) on assets outside of the country.

Currently, UK domiciled individuals (those whose home country is UK) but live abroad, are charged IHT on their estates globally.

However, under plans to move to a “residence-based regime” from April next year, expatriates who have lived outside of the UK for 10 years or more will only need to pay IHT on assets in the UK. Sam Dewes, a tax partner at accountancy firm HW Fisher, said: “Although the IHT proposals are at an early stage, they look set to impact UK domiciled expats.

“The suggestion at present is that after ten years of non-uk residence, expats would only be subject to IHT on their UK assets, putting them in a better position than the current rules.”

Under current rules, for example, if a UK domiciled person moves to Spain aged 66 and passes away 14 years later at the age of 80 without moving home, IHT would be liable on their estate for assets in Spain and the UK, unless they had changed their domicile to Spain.

However, under changes 2025, IHT will only be payable to HMRC on assets in the UK. Any assets in Spain will be subject to the domestic tax regime. Chris Etherington, partner at tax consultancy RSM UK, said: “This announcement is a major boost to expats who may have been worrying about their IHT exposure, despite leaving the country many years ago. It makes the system a lot simpler to understand and enforce. Retirement abroad could suddenly become a much more attractive prospect for some as a result of this change.”

Jeremy Hunt announced in the Budget that generous tax breaks for non-domiciled individuals would be replaced with a “fairer system” from April 2025, with new arrivals to the UK paying the same tax as everyone else after four years. The tax break allows foreigners who are based in the UK but “domiciled” elsewhere to avoid paying tax on their overseas income. Alongside this announcement the government said it intends “to move to a residence based regime for inheritance tax and will consult in due course on the best way to achieve this.”

The document added that no changes to inheritance tax will take effect before April 2025. The UK has one of the highest inheritance tax rates in the world at 40 per cent. Many countries do not tax the estates of the deceased.

Currently, non-doms pay no tax on income and gains earned and held overseas for their first seven years in the country. Under the proposed changes non-doms’ families would not pay inheritance tax if the individual passed away during their first decade in the country.