Driven to Dubai? The exodus of rich non-doms from the UK under new inheritance tax rules

From next April, the non-dom tax regime will be replaced by one based on residency leaving many estates with overseas assets vulnerable to UK inheritance impositions

UK Chancellor Rachel Reeves speaks to the press after Prime Minister Keir Starmer's 'Plan for Change' speech at Pinewood Studios near London. Bloomberg

Rachel Reeves's recent budget set the cat among the pigeons for the UK's non-doms, forcing many of those who live in the UK but are not domiciled there for tax purposes to reconsider their options or be rolled fully into the chancellors net.

As the new more broadly based inheritance tax (IHT) regime comes into effect, the question now being asked is might it be better to die in Dubai? Even then there is a poison pill with leaving as the revised rules lay down a continuing inheritance tax burden.

“There is undoubtedly a mass exodus,” Andrew Marr, managing partner at tax specialists Forbes Dawson told The National. “Business is booming at the moment with people seeking to leave. It’s now a perfect storm. The last government taught everyone how to work location-independently with draconian Covid restrictions. They have now provided a massive financial incentive to leave.”

For international investor and entrepreneur Dr David von Rosen, that financial incentive is causing a “steady trickle of [wealthy] moving from the UK to other locations like Dubai and Switzerland”.

“My instinct is that the changes to the non-dom regime will only contribute further to that flight,” he told The National. “Simply put, the non-dom setup was very enticing. Without it, it’s just one more notch working against the UK when it comes to attracting and retaining successful wealth-makers.”

As such, it all comes down to where you live. According to the UK government's own website, from April 6, 2025, “the test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises”.

At the moment, if a non-dom dies, the UK-based part of their estate is subject to IHT. All their overseas assets from property to trusts, from cash to bank accounts and so on that are held outside Britain are not subject to UK IHT. But from the April 6 next year they will be. A recent survey of non-doms by Oxford Economics postulated the new tax regime may result in about one third per cent of them leaving the UK, resulting in a net loss to the Treasury of £900 million, rather than the earlier estimate calculated by the Office of Budgetary Responsibility (OBR) of a gain of £3 billion.

Sting in the tail

However, UK inheritance tax has a sting in the tail, and this very much depends how long a non-dom has been resident in Britain. The IHT “tail” means you remain liable for IHT on your worldwide assets, even after leaving the UK. It's a sliding scale – if you have lived in the UK for 20 or more years, your worldwide assets will remain liable for IHT for ten years. If you leave the UK after being resident between 10 and 13 years, the IHT-tail will be three tax years. Each extra year of residence gives an extra year of IHT liability up to a maximum of ten years.

“Any non-doms with less than 15 years (out of 20) of UK residence up to the current tax year, will never face IHT on their worldwide assets if they ensure they are non-UK resident in 2025/26 and subsequent years,” Phil Moss, tax partner at Lubbock Fine told The National. “The key question is whether they are UK resident under the statutory residence test (SRT) for 2025/26, which may be unlikely if they leave on April 7, 2025 and don’t return for a year.”

The IHT tail becomes a more important issue the older the taxpayer is, and therefore the “die in Dubai” scenario becomes financially astute. “Get out while you have a three year tail,” Mr Marr told The National. “It’s an odd policy in this way, because the UK is cutting off its financial nose to spite its political face.”

Britain's Chancellor of the Exchequer Rachel Reeves. Andrew Marr, managing partner at tax specialists Forbes Dawson told The National that with the Budget, the government has "now provided a massive financial incentive to leave." EPA

Death and taxes

Aside from worldwide assets, a pensions issue lurks just beyond the horizon, prompting some rethinking on tax residency. At the moment, most peoples' unused pension savings avoid IHT, but from April 6, 2027, IHT will apply to unused pension funds and death benefits.

The tax specialists Forbes Dawson illustrate the "die in Dubai" principle on its website with a theoretical client (Bill) who instead of dying in the UK (after the April 6, 2027), opts to die in Dubai. In this hypothetical scenario, Bill moves to Dubai on the April 6, 2026, becomes a non-UK resident and begins to draw down his £4 million pension fund to the tune of £200,000 a month, payments that are free from withholding tax because of the tax treaty between the UK and the UAE.

Then Bill gifts half the monthly payment to his daughter Jill and lives on £100,000 per annum. If he dies after two years, the pension fund is empty and the value of the estate assessable for IHT is reduced. Plus, he was been able to gift Jill £2.3 million a year.

Bill's example, of course, has limitations and Forbes Dawson recognises this. He'd probably need another source of financial support aside from his rapidly depleting pension fund, given he doesn't really know exactly when he's going to die. In addition, he must die in Dubai. If Bill returns to the UK within six years, he'd become liable for income tax on the pension withdrawals.

“For those who wanted to specifically avoid the IHT hit on their pensions, it was key that their future destination have a tax treaty with the UK,” David Lesperance, founder and principal at the immigration and tax advisers Lesperance and Associates told The National. “This requirement limited the number of potential future tax homes Dubai quickly became popular for three reasons. First, it has a double tax treaty with the UK. Second, it has all the lifestyle requirements for retirees. Third, the processing is the fastest and most straightforward of all the tax treaty countries.”

The UK government estimates that in the tax year ending in April 2023, there were 74,000 non-domiciled taxpayers who paid around £12.3 billion in taxes. The number that have already left, will leave before the end of this tax year or plan to depart soon thereafter is difficult to calculate. Where high net-worth individuals base themselves is a decision made in conjunction with a numbers of factors, with tax arrangements being just one. Mr Moss points out the “tax tail shouldn't wag the dog” and lifestyle factors, including children's schooling are often deemed more important.

Anthony Whatling, managing director at Alvarez and Marsal has seen an increase in the number of clients “reviewing their options for becoming non-UK resident” with popular destinations being Spain, Italy, and the UAE. “Having said that, we would always stress that these decisions should not be tax-led, but considered holistically alongside their family, business and lifestyle needs,” he told The National.

As a result of shifting tax residencies, some ultra wealthy will end up spending much less time in the UK. As non-dom status falls away next year, those who wish to insulate their worldwide assets from IHT, basically become non-resident for UK tax purposes, may well have to reduce the amount of time they spend in the UK, especially if they have a home in Britain. This could range from as little as 16 to 90 days, depending on a variety of factors.

But for some, Mr Marr told The National, the new rules made clear it was time to depart. “A few months ago I was party to a conversation where a client worked out that it was going to cost him £38,000 per day in tax if he stayed in the UK a ‘normal amount’ [of time] compared to restricting his days, so that he became non-resident.”

Mass departures

Tax advisers and immigration experts are seeing a significant rise in the number of clients now actively pursuing an exit strategy. “Since the budget I have been averaging two or three UK clients per day who have actually spent money,” Mr Lesperance told The National. “These new clients are serious both in their intention and effort to properly relocate their families. In 34 years of practice since I helped my first UK based client this is unprecedented.”

Mr Moss said his firm is working with a number of clients who are “considering their immediate and long term connections to the UK due to these changes” and that “a good proportion of these are likely to leave before April 2025 or accelerate their plans over the next few years”.

“The potential 40 per cent IHT exposure on worldwide assets for anyone UK resident for 10 years, and then an ongoing exposure for between three and ten years after leaving, in particular seem especially punitive to [the ultra wealthy] when many alternative destinations either do not levy estate and gift taxes or do so at much lower rates,” he added.