The overall picture for current UK expats is generally a positive one ahead of new tax rules coming into effect on April 6 2025, according to Helen Clarke, HNW and international partner at Irwin Mitchell.
Following the Autumn Budget, Rachel Reeves introduced a new set of rules which included the introduction of the foreign income and gains regime.
This will offer 100 per cent relief on foreign income and gains for the first four years of UK tax residence for certain returning expats.
Reeves also unveiled a new residence-based system for IHT which will affect the scope of property brought into UK IHT for individuals and settlements.
Clarke said: “Under the current rules, many expats may still potentially be UK domiciled despite having lived outside the UK for many years.
“In contrast, the new residence-based system operates in a much more clear-cut manner, so many expats will be able to determine conclusively that they are non-long-term residents.”
The greater clarity of the new rules will also allow some expats to re-establish links with the UK which they previously gave up.
According to Clarke, this provided an opportunity for lifetime estate planning by non-LTR expats who might previously have been hesitant due to possible IHT charges if they were considered UK-domiciled.
“For example by making lifetime gifts to individuals or trusts which will not now qualify as potentially exempt transfers or chargeable lifetime transfers.
“Non-LTR expats can also be confident that their non-UK assets are excluded property for IHT purposes and will remain that way unless they become LTRs again.
“The greater clarity of the new rules will also allow some expats to re-establish links with the UK which they previously gave up.
“Although care must be taken with regard to the Statutory Residence Test, it will generally be simpler for expats to plan how much time they can spend in the UK and what assets etc they can possess here without becoming UK resident under the formulaic requirements of the SRT,” she explained.
One downside of the rules, identified by Clarke, was that there was a greater risk that spouses may not have matching residence statuses, as it is relatively easy to align domiciles based on common intentions whereas the SRT operates in a much more prescribed way.
“This means that LTR elections will be more common, however these only lapse after 10 years or, if made on death, are apparently irrevocable according to the current draft legislation.
“There is therefore a planning opportunity to assist clients in aligning their tax residence statuses as far as possible to avoid having to rely on elections.
“This is important for clients considering estate planning and who were hoping to rely on spouse exemption on death. Their wills should be revisited together with the overall succession plan,” she added.
Non-dom changes
Reeves announced she would be scrapping the non-dom tax regime and replacing it with a simpler residence-based regime.
However, after receiving scrutiny that these changes would drive HNWIs out of the UK, taking their wealth with them, Reeves decided to soften the rules.
This change would see the temporary repatriation facility extended to three years, which allows non-doms to bring foreign income and gains made before April 2025 into the UK.
While also paying tax at a reduced rate of 12 per cent in the 2025-26 and 2026-27 tax years, compared to the maximum income tax rate of 45 per cent.
Those UHNW non-doms who have not already made or triggered their exit plan have not seriously compared their future tax burden against life inertia and the alternatives
David Lesperance, managing director at Lesperance & Associates, highlighted how many UHNW non-doms had already left the UK ahead of the changes coming in on April 6, resulting in a significant drop in annual future tax collections for the Treasury.
“If the future tax hit is greater than the ‘life inertia’ (work, school, home, familiarity) and there is a suitable destination which is more tax efficient while meeting all the family members’ needs….they will move.
“That logic explains why UHNW non-doms are leaving in droves. They do not need to stay in the UK to make or maintain their wealth. They can reproduce their personal and business lives elsewhere and the incoming IHT hit alone is sufficient force to overcome their life inertia.
“Those UHNW non-doms who have not already made or triggered their exit plan have not seriously compared their future tax burden against life inertia and the alternatives,” he explained.
Toby Band, financial planning director at First Sentinel Wealth, said advisers needed to be speaking to clients to understand their long-term intentions and how remittance has been claimed previously.
“The ability to take advantage of capital gains rebasing, the FIG exemption, and the Temporary Repatriation Facility will depend on individual circumstances, but could be highly valuable for families, particularly those who have hesitated to bring money into the UK due to their longevity as a UK resident and deemed domicile status, where previously these assets would be taxed at the highest marginal rate of income tax.
“For non-doms who expect to remain in the UK, a strategy should be developed for onshoring assets, as if no action is taken in the years ahead, assets will be liable to UK tax at the full rate as before.
“Tax advisers in the UK and local to where their assets are held should be consulted to assess the value in making any structural changes to existing offshore investments,” he added.
alina.khan@ft.com