A Q&A on Inheritance Tax

• In this year’s Spring Budget, the government announced it intends to move IHT from a domicile-based system to a residence-based system
• The changes will mean that people who have been tax residents in the UK for ten years will be subject to IHT on their worldwide assets
• The changes are currently set to come into effect from 6 April 2025
• However, if the Conservatives do not win the upcoming General Election, it is likely that the proposed rules may change
• Until more is known, high net worth individuals (HNWIs) should focus on understanding how the proposed changes may impact them but delay substantive action in most cases until a clearer picture of the new IHT landscape has emerged

What changes were announced with regards to inheritance tax in the Spring Budget? 

In March of this year, the government announced that it intends to move IHT from a domicile-based system to a residence-based system. 

Under the current rules, IHT is charged on the value of a non-UK domiciled individual’s UK assets and on the value of the worldwide assets of a UK domiciled (or deemed domiciled) individual, subject to variations that arise as a result of certain double tax treaties.

Under the proposed new rules, IHT will be charged on worldwide assets owned outright when a person has been resident in the UK for 10 years, with a provision to keep a person in scope for 10 years after leaving the UK. If an individual has not been UK resident for 10 years, they will remain chargeable to UK IHT only on their UK situated assets.

These current plans, however, are subject to consultation, and may be altered if a new government is elected in July.

The government has also announced that trusts settled from 6 April 2025 will no longer be ‘protected’ for IHT purposes and instead become what is referred to as “relevant property” subject to ten-year IHT charges. 

Who will be impacted?

Non-domiciled individuals (potentially including those who left before these changes were even announced) and individuals who are currently UK domiciled but living outside the UK may find their UK IHT exposure changing as a result of these proposed rules. 

Those affected by the new rules will include individuals leaving the UK as the 10 year ‘tail’ will mean their non-UK assets remain subject to UK IHT for a longer period after departure than under the current system. 

The big winners appear to be UK domiciled expats who are likely to see their non-UK assets fall out of the UK IHT net sooner than under the current “domicile based” system. After residing outside the UK for ten years, they will now only be required to pay IHT on assets situated in the UK.

Under the current regime, a non-dom HNWI who has been in the UK for less than 15 years would only pay UK IHT on their UK assets. Under the new rules, if they've been resident for more than ten years, they'll be subject to UK IHT on their worldwide assets. 

Let’s take as a basic example an individual who is presently a UK resident non-dom and who has been resident in the UK for 11 years. For the purpose of these examples, we have assumed no tax-free threshold, with no reliefs/exemptions available. 

They have UK assets of, say, GBP10 million and foreign assets of GBP20 million. Under the current system, if they passed away today, their estate would only have to pay UK IHT on the UK assets – meaning an IHT tax liability of up to GBP4 million.

Under the new system, they'll have to pay UK IHT on their worldwide assets, giving them a GBP12 million exposure. 

When will the changes come into effect?

The changes are currently set to come into effect from 6 April 2025. Listening sessions took place in May, and these will have provided external thinking from stakeholders on the proposed changes. The next step will be consultation, then draft legislation. 

However, if Labour wins the General Election in July, they’ll likely have their own ideas about what the new rules should look like.

What should HNWIs be thinking about from a planning point of view? 

HNWIs should focus on understanding how the proposed changes could affect them and start engaging with the appropriate advisors now to enable action once more is known.  

It makes sense to wait for draft legislation to understand what changes may be introduced before actually acting on those plans, but commencing the process of obtaining advice now is a sensible move. 

In terms of planning, the first step would be for HNWIs to understand their tax residence position and therefore their own timelines of when these changes could affect them. This will impact when they could be subject to UK IHT on their worldwide assets and – if they’re going to become non-UK tax residents as a result of these changes – how many days they can spend in the UK before triggering UK tax residency. 

We recommend individuals review their current structures and understand what assets are held, how they are held, valuations and where they are located to enable advisors to best serve them. 

Finally, another approach adopted by some people is to acquire a life insurance policy to potentially mitigate against increased UK IHT exposure on worldwide assets. This usually takes the form of a fixed-term policy to cover the period the client is a UK resident and for the duration of their “residence tail” following their departure. The policy could then, in theory, provide their beneficiaries with the funds to settle the estimated IHT liability.

What should HNWIs next steps be?

For now, HNWIs should focus on understanding how the proposed changes may impact them but delay substantive action (in most cases) until a clearer picture of the new IHT landscape has emerged.   

Start reviewing your current structure(s) to enable your advisors to best advise you. Start engaging with your advisors now to ensure you are able to act once legislation is published. 

It’s also important for HNWIs to make sure their wills are up-to-date and tax-efficient, and to use any IHT allowances and exemptions. They might also wish to engage with their professional advisors (including tax advisers, lawyers and trustees) to gain a full understanding of the current regime regarding gifts and consider if this is a strategy they wish to deploy before the new IHT rules are applied.

At HSBC Global Private Banking, we’re able to support clients holistically and help achieve their wealth planning needs. While we can't give tax and legal advice, we can help clients take advice on issues impacting them and then help implement it.