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Inheritance tax shake-up

Major changes to inheritance tax (IHT) came into effect on April 6 as the UK moves from a domicile assessment to a residency-based system. If you have lived in the UK for at least ten of the past 20 tax years you will be treated as a long-term resident for tax purposes, and subject to UK IHT on your worldwide estate. With long-term residence becoming the basis of a person’s IHT liability, some expats may have seen their IHT liability effectively disappear overnight on April 6.

The changes are broadly positive for expats in the UAE and provide valuable clarity for UK citizens living overseas. People who have not been resident in the UK for 10 of the past 20 years will only be liable for UK IHT on their UK assets. Non-long-term residents can simply move assets out of the UK to make them IHT-exempt.

The inheritance tax ‘tail’ if you’ve moved abroad permanently 

There are also changes to how long people remain within the scope of UK IHT once they have become non-resident overseas. The longer individuals live in the UK, the longer they stay within the UK tax net after leaving.

• If someone has lived in the UK for 20 years or more, they will stay within the IHT tax system for 10 years after leaving.
• If they have lived in the UK for 10-13 years, your IHT tax ‘tail’ is just three years. This increases by one year for every year of residence, up to the maximum of 10 years.

Mitigate IHT exposure

Following the recent changes, expats planning on returning home to the UK can take steps to make sure they are as tax efficient as possible.

For example, it may be worth considering gifting non-UK assets to avoid IHT. As of April 6, if an individual is not a long-term resident at the time of making a non-UK gift, the gift remains exempt from IHT, even if the donor dies within seven years as a UK long-term resident.

Tax break for new UK residents

People who return or move to the UK after at least ten consecutive tax years of non-residence will benefit from the UK government’s new foreign income and gains (FIG) regime, which took effect on April 6.

The FIG regime exempts certain foreign income and gains for the first four years of UK residency, and new UK residents will receive 100% tax relief on foreign assets over this period. This applies to individuals moving to the UK for work, investment or personal reasons. 

Since foreign income and capital gains are tax-free for the first four years, it would make sense to accelerate foreign earnings before the exemption expires, including by selling high-value foreign assets, realising capital gains and extracting dividends profits from foreign businesses before the end of the four years.

Before worldwide assets become subject to UK taxation at the four-year point, individuals should consider placing them in an offshore discretionary trust before moving to the UK. Once in a trust, the assets can grow free of UK capital gains tax (CGT). Future distributions from the trust may not be subject to UK tax, depending on the structure and investments used.

More good news for expats

There’s more good news regarding pensions. While UK pensions remain liable to IHT (from April 27), Qualifying Recognised Overseas Pensions Schemes (QROPs) are not. Removing UK pensions from assessment to IHT may be possible by utilising the Double Tax Agreement between the UK and the UAE. Further advice is imperative when exploring this option.

Non-long-term residents can make gifts outright or into a trust of any amount, and even if they reestablish UK residency later, these (outright) gifts will remain exempt from IHT.

Remember UK tax residency rules

Anyone assessing their UK tax liability under the new rules will need to consider the UK statutory residence test. People are UK tax resident for a year if they meet any of the following criteria:

• The 183-day rule – if an individual spends more than 183 days or more in the UK during a tax year, they will automatically be considered a UK tax resident. An individual will also automatically be considered a UK tax resident if: 
• They have a home in the UK where they spend at least 30 days in a tax year and spend fewer than 30 days in any overseas home,
• They work full time in the UK for at least 365 days with no significant breaks.

Overall, UK expats have emerged as the winners from last year’s budget. Britons living in the UAE should review their assets to ensure they are well-positioned to benefit from the changes, whether they are staying in the Middle East for the long-term or planning to return home. As you weigh up your options, seeking personalised financial advice can better position you to make the most of the new tax environment and build your wealth from the UAE. 

To learn more about how SJP could assist you with your finances please go to www.sjp.ae  

Author: 

Tony Müdd

Divisional Director, Development & Technical Consultancy, St. James’s Place