In their attempt to simplify and reduce the tax breaks currently available to non-UK domiciled individuals (Non-Doms), the Government’s proposed legislative changes will remove the concept of domicile as the defining basis for liability to UK Inheritance Tax (IHT), instead replacing it with a Residence based test.
Whilst this provides more certainty, due to Residence being assessed under the Statutory Residence Test (SRT) for any given tax year, rather than the subjectively nuanced tests for Domicile, it also raises uncertainties in other areas.
- 10-Year Rule: Individuals who have been UK residents for over 10 years and then leave will still be subject to IHT on worldwide assets for another 10 years. How will this 10-year tail be monitored by HMRC and how will the (presumably) overseas executors of those individuals who leave the UK and die within 10 years be made aware of their UK IHT liabilities.
- International Comparisons: Countries like Australia, New Zealand, and some European nations have no or low taxes on death, potentially influencing the residency decisions not only of existing Non-Doms, but also those of wealthy domiciled Brits who now have a much clearer, defined path to escaping UK IHT.
- Tax Treaties Uncertainty: The UK’s 10 capital tax treaties, currently based on domicile, may need revision under the new IHT rules, particularly affecting those domiciled in India, Pakistan, France, and Italy. Initial thoughts are that the terms of the existing treaties may well still apply to limit UK IHT to UK assets where the individual is domiciled under general law in that other jurisdiction.
The Conservatives have promised a consultation on IHT before introducing any legislative changes. Meanwhile Labour, in their recent responses on the Non-Dom changes proposed, have not commented on IHT, instead targeting the ‘loopholes’ in the transitional provisions (see our Budget summary here). It will be interesting to see what their views are on IHT reforms, should they win the next General Election.
