British expats could be winners in inheritance tax shake-up

The knock-on effect of abolishing the non-dom tax status could result in expats paying no UK inheritance tax on their foreign assets

DUBAI, UNITED ARAB EMIRATES - SEPTEMBER 11: Locals and expats join holiday makers as they relax on the beach with Burj Al Arab in the background ahead of  Eid Al-Adha on September 11, 2016 in Dubai, United Arab Emirates. Muslims across the world are preparing to celebrate Eid Al-Adha, or the Festival of Sacrifice, which marks the end of the Hajj pilgrimage to Mecca which thousands of Muslims all over the world embark on.  (Photo by Tom Dulat/Getty Images)
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Thousands of British expatriates living overseas could be set for a reduction in their inheritance tax (IHT) bills as part of the UK government's move to get rid of the non-dom tax status.

It means foreign assets in the estates of British expats may no longer attract IHT. At the moment, people who are UK domiciled, but live abroad, are charged IHT on their estates globally.

In his budget on Wednesday, Chancellor Jeremy Hunt said the Treasury "will get rid of the outdated concept of domicile and the remittance basis in the tax system, and replace it with a modern, simpler and fairer residency-based system".

The effect of switching to a residency-based system should mean that British expats who are living in places such as the UAE, but remain domiciled in the UK for tax purposes, could avoid incurring IHT on the parts of their estates that are held overseas.

But nothing is set in stone regarding exactly how this residency-based system will affect the IHT liabilities of UK-domiciled individuals living overseas, as the Treasury said it "will consult on the best way to move IHT to a residence-based regime".

"Decisions have not yet been taken on the detailed operation of the new system, and we intend to consult on this in due course," the Treasury added.

However, the suggestion in the government's papers associated with this week's budget hint at expats who have lived overseas for 10 years or more being liable for IHT only on assets in the UK, not on their foreign-held assets.

"It seems the concept of domicile will be largely irrelevant in the future for UK tax purposes," Chris Etherington, a partner at RSM UK Tax, told The National.

"For someone living overseas, an exposure to inheritance tax will be determined by their tax residence instead. It may become much more important for individuals to monitor and maintain the non-UK tax residence status" he added.

The foreign-owned assets might attract IHT in the countries where they are held, but many countries have lighter or no IHT regimes, for example Australia, Estonia and Norway.

However, the UK government has said that related changes to IHT will not happen until 2025 at the earliest.

A retirement in the sun

Any changes could also have the potential to make overseas retirement much more attractive to those coming to the end of their working lives in the UK.

"We could see a raft of retirees looking for the ‘world’s worst travel brochure’, highlighting countries that do not typically charge inheritance tax," Mr Etherington told The National.

"Places like Australia and New Zealand may prove to be attractive destinations for a retirement abroad as a result."

John McCaffrey, head of tax at Alexander & Co, agrees that UK retirees could become even more tempted to retire overseas, taking their spending power with them.

"Actually, liquidating your assets [in the UK] and moving overseas could be seriously beneficial," he told The National.

"Which surprises me, because this would be a great way of taking assets out of the UK and why would he [Jeremy Hunt] do something like that?"

But there could also be a significant time period of transition, according to Anthony Whatling, managing director at Alvarez & Marsal Tax.

"It's worth noting that retiring abroad could lead to a period where an individual might be subject to IHT (or its local equivalent) in both the UK and the new jurisdiction for the first 10 years," he told The National.

"However, double tax treaties should ideally prevent double taxation."

The website International Travel produces an annual Global Retirement Index, which lists the top places in the world to retire to, according to a survey it conducts of retirees living overseas.

Countries are ranked using seven criteria, from housing to ease of acquiring visas, and cost of living to health care – and, of course, climate. The ratings are then averaged out to give a final score.

In this year's index, Costa Rica takes top spot, followed closely by Portugal. Half of the top 10 are in Latin America, while four are in Europe.

'Clearer for all'

The boon to British expats could be considerable, if foreign assets are excluded from UK IHT calculations.

An estate's first £325,000 is exempt from IHT and above that a 40 per cent rate is applied, which is one of the highest in the world.

As a simple example, if your estate is worth £1 million, IHT would be 40 per cent of £625,000, or £250,000.

But if the new residency-based regime is applied in the way many think it will be and £200,000 of your estate is foreign-based assets, then your IHT bill becomes significantly reduced, because your UK estate is worth £800,000. Therefore, your UK IHT liability becomes £190,000.

However, this very basic illustration, and given the complexity of the UK tax system, by no means illustrates what may come to pass after the Treasury's period of consultation.

Also, there is no IHT payable on estates over £325,000, provided everything is left to a spouse, civil partner, charity or community amateur sports club.

In addition, if you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, the IHT threshold can rise to £500,000.

Mr Whatling points out that the Treasury's consultation paper will detail the "system's operation, mentioning that 'other connecting factors' may also be considered".

"We need to await the consultation paper to understand the full implications, but it's possible that merely being non-resident may not suffice to escape the IHT net," he told The National.

"Connections to the UK, such as property, family, or other links, may still bring expats within the scope of IHT. Nonetheless, the new system promises to be clearer for all."

In response to a request for comment from The National, an HMRC representative said: “Some points of detail regarding inheritance tax will be settled after consultation with representative bodies and other interested parties.

"Further updates and draft legislation will then be published later this year, inviting technical comments.”

Another big uncertainty in all this is a potential change in UK government if the opposition Labour party were to be victorious in a general election later this year.

"The devil will most definitely be in the detail of any actual legislation," Mr McCaffrey told The National.

"What the final form looks like may not be what the Conservatives had in mind to begin with."

Updated: March 09, 2024, 7:30 AM