Planning opportunities for British expatriates returning to the UK

The UK’s March 2024 Budget hit the headlines with sweeping changes to the taxation of “non-doms” (see our detailed analysis of the Budget announcements here), but there has been less focus on what these changes could mean for individuals with a UK background.  

The proposed regime potentially opens opportunities for British expatriates living around the world.

No draft legislation has been released yet, and there are many hurdles to cross before the proposed regime becomes law.  This note considers the implications of the proposals for British expatriates based on the policy papers released on Budget day.

Key features of the proposed regime relevant to British expatriates 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 test will be introduced.  The non-UK estates of individuals who have been non-UK resident for ten years will be outside the scope of IHT.

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 proposed 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.

British living abroad might take advantage of this favourable proposed 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.

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 expatriates is uncertain.

If IHT is based purely on residence, globally mobile individuals will have certainty that their liability to IHT in respect of non-UK assets will cease after ten years of non-UK residence.

Ability to create trusts, foundations and other structures

The possible 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 expatriates creating trusts and certain other structures when their domicile status is in doubt.

Certainty of IHT treatment of non-residents would open up opportunities for expatriates who have been non-UK resident for a substantial 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 expatriates resident in jurisdictions in which trusts are a cornerstone of estate planning, such as the US.  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 itself. There may be scope for a trust which is not initially within the scope of IHT to come within the scope of the tax if the settlor resumes residence in the UK and remains UK resident for a significant period, and this point will need to be watched.

A word of caution

The announcements regarding IHT are much less settled than the income tax and CGT changes. There is a clear intent to move to a residence-based test, but the Government intends to consult on the details.

The policy paper refers to “other connecting factors” that may be included in the new IHT regime.  It is hoped that whatever form the proposed regime takes, long-term non-UK residents should not be subject to IHT merely on the basis of birth in the UK, but this remains to be seen.

Need for advice

The proposed 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 returning to the UK, because becoming UK resident can have implications if an individual has any involvement with corporate, trust and other structures.