Given the inexorable link between one's domicile status under English law and exposure to UK Inheritance Tax ("IHT"), any changes to the interaction between common law domicile and the associated taxing provisions were always going to have a knock-on effect on IHT.
Currently (and very broadly speaking), an individual who is domiciled in the UK is subject to IHT on their worldwide assets when they pass away. This is largely irrespective of whether that person is tax resident in the UK or not. In yesterday's budget, however, it was announced that it was the intention for the scope of IHT to move to a residence-based regime, rather than being linked to a person’s domicile status - albeit with no changes to be effective before 6 April 2025.
There is very often very substantial nuance (and practicality) between headline announcements and the eventual legislation. The fairly modest pieces of information we do know are limited to those released in the Red Book (the deep technical analysis behind the executive summary), which includes the promise of a consultation from HMRC, including on elements such as a 10-year exemption from IHT for new arrivals to the UK, and a 10-year 'tail' for those leaving the UK. Whether a tail - the period of time before which someone may fall outside the UK IHT net - would, itself, have a taper to reduce the applicable rate of IHT over that period (similar to how we see with Potentially Exempt Transfers - "PETs") will depend on the outcome of the consultation.
What about non-UK trusts?
Of course a further effect of the changes announced yesterday are concerning non-UK trusts established by non-UK domiciled settlors. Although such trusts will appear to lose many or most tax ‘protections' as a result of the proposed new rules, the preliminary announcements do suggest that the IHT protections afforded to excluded property trusts that have already been established will remain in place. These trusts already experienced sweeping changes in 2017, so will there really be a desire to further amend rules around existing trusts that, in reality, affect only a very small part of the population?
A question of when
The next question is when any such changes may be expected to take effect. Given that there will be an General Election in the UK by the end of January 2025 (and it is generally assumed much sooner) at which the incumbent Conservative Party currently seems on course to lose, it is highly unlikely that the consultation period, and the drafting and enacting of legislation would happen by April 2025. The raft of trust changes in 2017 and 2018 were fraught with uncertainty, apparent gaps and mass confusion amongst the public and advisors alike, so it may well be that the Treasury would prefer to have more time to deal with the scrapping of a tax regime that has existed in the UK since at least 1799.
At this stage, assuming the political appetite remains to make these changes, April 2026 is looking like a far more realistic timeframe.
Watch this space
As and when we receive more information on the consultation and eventually the legislation, we will release further updates. If you would like to discuss your options and what the changes may mean for you in practice, please don’t hesitate to get in touch with your usual contact, or via hello@sanctoras.com
