The dust is still settling on last week’s Budget.
Things like increased National Insurance Contributions and a higher government borrowing ceiling have already been picked apart by the mainstream media.
However, in this post, I want to focus on a few areas that will be of interest to those of us who are either living outside the UK already or who are considering doing so.
1. Domicile is dead, long live the Long-Term Resident
From 6 April 2025, the test for whether your non-UK assets are on the hook for UK Inheritance Tax (IHT) will change.
Currently, the test is based on domicile, which is a concept of common law and is specific to the UK.
It is automatically acquired at birth and typically mirrors that of the father.
It is also incredibly difficult to change – the case with Richard Burton is a perfect example of the challenge involved.
That will change and from next April, the test will be whether you are a long-term UK resident.
Specifically, have you been resident in the UK for at least 10 out of the last 20 tax years?
If you have, then you will be classed as long-term resident and your worldwide assets will be subject to UK IHT.
If you have not, then only your UK-situated assets will be subject to UK IHT.
This change should bring much-needed clarity to cross-border estate planning.
Example
Jim is UK domiciled but became non-resident in 2011-2012.
He owns a property in London as well as assets outside the UK.
On 6th April 2025, Jim will be classed as not long-term resident under the 10 out of 20 test and so will not be in scope for UK IHT on his non-UK assets.
However, his UK property will remain subject to UK IHT.
2. QROPS changes
The 25% Overseas Transfer Charge (OTC) now applies more broadly to QROPS transfers.
Previously, you could transfer a UK pension to a QROPS in the European Economic Area (EEA) or Gibraltar without this charge, even if you lived in a different EEA country.
Now, the OTC exemption only applies if the QROPS is based in the country where you live.
For example, if you live in Canada or Australia, you can still transfer a UK pension to a QROPS in these countries without being subject to the OTC.
I suspect that this change will affect the long-term viability of a number of QROPS providers.
3. Non-domiciled spouse exemption
If you are married or in a civil partnership and both partners are UK-domiciled, any assets you transfer to each other are completely exempt from inheritance tax (IHT).
However, if only one of you is UK-domiciled, this exemption is capped at the current nil-rate band (NRB) limit of £325,000.
Since 17 July 2013, there has been an option for the non-UK domiciled spouse or partner to be treated as UK-domiciled for inheritance tax purposes.
This choice allows them to receive unlimited IHT-exempt transfers from their UK-domiciled partner.
Once this election is made, it is permanent unless the electing partner leaves the UK and remains non-resident for at least four consecutive tax years.
From 6 April 2025, new rules will come into play for partners of long-term UK residents who are not long-term residents themselves.
Under these rules, a non-UK domiciled spouse or partner of a long-term resident can choose to be treated as a long-term resident.
This election will remain valid until the spouse or partner has been non-resident for 10 consecutive tax years.
4. UK pensions are now subject to Inheritance Tax (IHT)
In the weeks leading up to the budget, there were many rumours about what would happen to pensions.
No one predicted this.
Starting April 2027, unspent defined contribution pension funds will be subject to inheritance tax upon the death of the pension holder.
Previously, these funds were generally exempt from IHT.
As things stand there is a lot of uncertainty with regards to how this one will play out.
The government is starting a consultation period which will last until January 2025 and I would advise against any changes in your pension strategy until we have a clearer idea of the facts.
In the meantime, I will continue to provide updates via this blog and my weekly newsletter, as and when they become available.
Talk about it
If you would like to discuss how any of these changes affect your personal financial situation, feel free to schedule a call with me.
