The UK’s Autumn 2024 Budget: good news for British ex-pats

The UK’s March 2024 Budget hit the headlines with proposals for sweeping changes to the taxation of “non-doms”, then in the Autumn Budget the new Labour Government confirmed that these changes would be going ahead in a substantially similar form (see our detailed analysis here). However, there has been less focus on what these changes mean for individuals with a UK background.  

The new regime potentially opens opportunities for British ex-pats living around the world.

While there may still be changes to some technical details before the new laws come into force on 6 April 2025, we now have some certainty as to the framework of the new regime.  This note considers the implications of the proposals for British ex-pats based on the draft legislation released on Budget day on 30 October.

Key features of the new regime relevant to British ex-pats from 6 April 2025

• A new four-year special tax regime will be introduced, under which qualifying individuals will be exempt from tax on their foreign income and gains for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK.  All individuals becoming UK resident after at least ten tax years of non-UK residence will be eligible for the special tax regime, regardless of their domicile.
• Domicile will no longer be a connecting factor for inheritance tax (IHT).  Instead, a new residence-based test will be introduced.  Individuals will be liable to IHT on worldwide assets once they have been UK resident in 10 out of the previous 20 tax years.  If they then become non-UK resident, their estates will remain subject to IHT during a “tail” of between 3 and 10 years, depending on how long they had been UK resident.
• Favourable transitional rules apply to shorten the IHT “tail” for individuals who are already non-UK resident in the current tax year and were not UK domiciled on 30 October 2024.  

Planning points

Returning to the UK

Under the current regime, an individual born in the UK with a domicile of origin in the UK who becomes UK resident is immediately treated as domiciled in the UK, and taxable on their worldwide income or gains.

Under the new regime, any individual returning to the UK after ten years of absence will be able to take advantage of the special tax regime, such that non-UK income and gains will be exempt from tax for the first four years of residence.

Brits living abroad might take advantage of this favourable new regime to return to the UK for a short period, for example for business reasons, to care for elderly parents, to settle children in at a UK school, or to cease being resident in another jurisdiction for foreign tax planning reasons.

The UK’s statutory residence test, although extremely complex, gives individuals certainty as to their residence status, so that they can clearly identify their first year of residence and the steps necessary to cease UK residence again, if desired.

Increased certainty of IHT treatment

At present, the worldwide estates of individuals domiciled in the UK are subject to IHT.  Individuals are born with a domicile of origin which can be displaced by acquiring a domicile of choice elsewhere, which involves moving to a different jurisdiction and forming a permanent or indefinite intention to remain there.  This causes difficulties for globally mobile individuals who leave the UK but do not settle in one state.  An individual born with a domicile of origin in the UK could live for decades outside the UK without ever losing the domicile of origin, because they fail to form a sufficiently permanent intention to remain in any particular jurisdiction.  It is not possible to obtain a domicile ruling, so the IHT position of many British ex-pats is uncertain.

If IHT is based purely on residence, globally mobile individuals will have certainty as to whether IHT applies to their non-UK assets.  Individuals who have been non-UK resident for 10 years by 6 April 2025 will be able to take advantage of this change with immediate effect from 6 April 2025.   A period of uncertainty will remain for British ex-pats who have been non-UK resident for less than 10 years because the transitional provisions apply only to those with a non-UK domicile on 30 October 2024.

Ability to create trusts, foundations and other structures

The new IHT regime has important implications for the creation of trusts or structures with a complex or uncertain IHT treatment, such as foundations or usufructs.  The transfer of assets to a trust by an individual domiciled in the UK generally gives rise to an immediate IHT liability, as well as ongoing IHT consequences.  As a result, there are risks associated with British ex-pats creating trusts and certain other structures when their domicile status is in doubt under the current regime.

Certainty of IHT treatment of non-residents will open up opportunities for ex-pats who have been non-UK resident for a sufficient period to create trusts and other structures after 6 April 2025 without any risk of an upfront IHT charge.  This may be useful for succession planning or asset protection reasons, providing a means of protecting and managing assets for future generations.  This will be particularly welcome for ex-pats resident in jurisdictions in which trusts are a cornerstone of estate planning, such as the US, or in civil jurisdictions in which usufructs are common.  

However, consideration will need to be given not only to the IHT treatment of a gift to a trust but also to the ongoing IHT treatment of the trust.  A trust which is not initially within the scope of IHT will come within the scope of the tax if the settlor resumes residence in the UK and meets the 10 out of 20 years test, and this point will need to be watched.

Need for advice

The proposed new regime should be simpler and clearer than the current rules.  However, it will still be necessary for individuals returning to the UK to take expert advice in the tax year prior to their arrival, because becoming UK resident can have implications if an individual has any involvement with corporate, trust and other structures.  It should also be noted that UK assets and assets deriving their value from UK residential property will remain within the scope of IHT regardless of an individual’s residence status.