Unintended consequences in relation to inheritance tax from the latest UK Budget could lead to a swathe of wealthy Brits exiting to low tax jurisdictions to mitigate tax bills, according to Rachel de Souza, tax partner at RSM.
In a briefing note on 12 March, she said currently, UK domiciled individuals are subject to inheritance tax (IHT) on their worldwide assets, whereas ‘non-doms’ are only subject to IHT on their UK assets.
There is a three-year tail built into the regime which means that those who cease to be UK domiciled or deemed domiciled, remain within the full scope of IHT for three years.
The aspiration is that as domicile as a tax concept is removed from the legislation, the IHT regime will pivot to a regime based on residence. The expectation is that anyone who has been UK resident for 10 years will be within the scope of IHT on worldwide assets and for those that do not meet this residency criteria, IHT will be charged only on UK assets.
However, there is a sting in the IHT tail as it will be extended from three to 10 years. In other words, anyone who has been resident for 10 years and then leaves the UK will remain subject to IHT on worldwide assets for a further 10 years. Individuals may now need to plan more carefully for IHT when they leave the UK.
The proposed change will give certainty to anyone who leaves the UK, including UK domiciles, who will not be subject to IHT on non-UK assets once they have been non-UK resident for 10 years.
Neither Australia nor New Zealand have an IHT, and closer to home there are more than a handful of countries who either charge no taxes on death or a comparatively low transfer tax (or equivalent).
In the no tax corner are the Channel Islands, with Malta, Cyprus, Italy and Portugal charging taxes of 10% or less, so we could see a stream of wealthy Brits head for other countries solely as a legitimate IHT mitigation strategy.
The UK has ten capital tax treaties that determine which country has the primary rights to taxes on death. All of these treaties are based on domicile, and it is unclear how these will apply in the future. However, for those domiciled under general law in India, Pakistan, France and Italy, where the existing treaties means that on death, they can only be subject to IHT on my UK assets, they may want to speak to their tax adviser sooner rather than later.
Lastly, it remains to be seen whether the Labour Party still have changes to IHT on their radar. With funding for some of Labour’s spending plans snatched from her grasp, there will no doubt be pressure on Rachel Reeves to reconsider the party’s position on IHT.
Reports suggest they have previously floated the idea of a review of IHT reliefs, and this could come back on to the agenda as they look to replace the loss of revenues from the non-dom changes which the Conservatives have now spent.