British people planning to retire overseas and those already living abroad are the “unexpected beneficiaries” of changes to the non-dom rules outlined in the Budget that could see them escape death duties of 40 per cent.
Currently, anyone with a British “domicile” faces inheritance tax, or IHT, on their global wealth even if they live and die overseas.
But under the new system, which replaces “domicile” with residency, most people living overseas for more than 10 years will not face IHT on their foreign assets.
Philip Munro, partner at law firm Withers, said that UK émigrés in expat hotspots such as Dubai, Spain, Hong Kong and Singapore were “net winners” from the non-dom rule changes.
“It was very hard to lose your UK domicile and acquire a non-UK domicile of choice,” he said. “This change is great news for long-term UK expats because essentially it takes them out of the UK inheritance tax net in relation to their foreign assets.”
The change could also convince people to retire internationally, if they are confident of living for another 10 years.
“If someone was thinking of retiring overseas, this may give them the push they needed,” said Chris Etherington, partner at accountancy group RSM.
Alexandra Britton-Davis, partner at accountancy firm Saffery, said it could make the difference between wanting to “retire in the south of England” or “somewhere warmer where they don’t have IHT”.
The changes that come into force in April will mean tens of thousands of Brits already living abroad will immediately benefit from being removed from the UK’s inheritance tax net on their death — provided they have lived outside the country for at least 10 years.
These include wealthy British entrepreneurs such as Richard Branson. Fund manager Terry Smith is another well-known business figure who has been based outside the UK since 2017.
“A lot of people who are expats don’t really appreciate what’s happened and may not be paying much attention to the non-dom rules, so wouldn’t realise they are the unexpected beneficiaries,” added Etherington.
The changes will also provide certainty for people who have been classed as British under the antiquated domicile definition rules, tax advisers said.
Currently, domicile is based on where an individual considers their permanent home to be. A person’s “domicile of origin” is determined by their father’s domicile at birth, with the mother’s domicile is only usually considered if the child was born outside of marriage.
A UK-domiciled status can be changed by acquiring a “domicile of choice” in another country, but it is not straightforward and relies on several factors. Cutting ties with your country of origin and gaining citizenship elsewhere can play a role but is not decisive, tax experts said.
“If as a Brit you’d been outside the UK for a long time, you were probably considered non-domiciled, but you wouldn’t be sure,” said Anthony Whatling, managing director at Alvarez & Marsal Tax. “After your death, your executors might end up in a dispute with HMRC.”
An HM Treasury spokesperson said: “Replacing the outdated non-dom tax regime with a new internationally competitive new residence-based system addresses unfairness in our tax system, attracts the best talent and investment to the UK, and ensures everyone who is a long-term resident in the UK pays their taxes here.”
Meanwhile, British people who have already spent more than 10 years out of the country could also return to it from April and benefit from the new regime, which gives 100 per cent relief on UK tax on foreign income and capital gains for the first four years of residence in the UK.
Under the rules, they also have to live in the UK for 10 years before being subject for full IHT.
“It is a planning opportunity which [British people] have never had,” said Tim Stovold, partner at Moore Kingston Smith. “Some people will think 10 years living abroad is a fine price to pay”, as long as the rules do not change again.
