British National (Overseas) holders and British expats should act now on UK Budget proposals
The proposed changes to the UK’s non-dom and Inheritance Tax (IHT) regimes, that were announced in the Spring Budget and detailed in last month’s Sovereign Report will, if approved, have substantial implications for British National (Overseas) visa holders (BNO) who are not UK domiciled (or deemed domiciled) and are currently living in the UK or BNO visa holders who are planning to moving to the UK for a significant period.
Under the Budget proposals, the UK government is to scrap the ‘non-dom’ tax regime, which is currently available to individuals who are resident but not domiciled in the UK and shelters their unremitted foreign income and gains (FIG) from UK tax for up to 17 years.
From 6 April 2025, the remittance basis will be replaced by a new ‘four-year regime’, which can only be accessed by new arrivals who have not been UK resident for at least 10 UK tax years. During this four-year period, FIG will be entirely exempt from UK tax and can be brought to the UK without a UK tax charge. But individuals who have been tax resident in the UK for more than four years will have to pay UK tax on their FIG, regardless of their domicile status.
The government also proposed moving from a domicile-based system for UK inheritance tax (IHT) to a residency-based one. IHT is charged at 40% above the tax-free threshold of £325,000. Currently, non-UK domiciled individuals are only within the scope of IHT on assets situated in the UK and certain categories of non-UK situs assets connected with UK residential real estate.
From 6 April 2025, IHT will be determined solely by residence with worldwide assets becoming subject to IHT where an individual has been resident in the UK for ten tax years, and for a further ten years after they cease to be UK resident.
Depending on when they moved, or move, to the UK, BNO visa holders will be able to benefit, wholly or partially, from the four-year window on FIGs, but unless they plan properly now, they risk being exposed to IHT on their worldwide assets once they have been UK resident for 10 years.
Currently, the FIGs from overseas assets that are settled inside an offshore trust are protected from taxation even if the settlor becomes deemed domiciled in the UK. But offshore trusts created after 5 April 2025 will not qualify for this protection. The FIGs will be attributed to the UK resident settlor and taxed on an arising basis.
From an IHT perspective, a trust settled with foreign assets by a non-UK domiciled individual is currently treated as an ‘excluded property trust’ (EPT), even if the settlor later becomes domiciled or deemed domiciled. This means that the assets will remain permanently outside the scope of IHT.
Our recommendation is that there is likely to be a clear advantage for any BNO visa holders to settle their overseas assets into an EPT now, before the detailed draft legislation is published because it may contain anti-avoidance measures that are effective from the date of publication.
The trust should be flexible and provide a clear exit strategy in case it needs to be wound up or restructured when further detailed information becomes available.
We would also recommend that any British expats who have resided overseas for several years and do not plan to resume UK residence should take the opportunity to gain certainty as to whether they have shed their UK ‘domicile of origin’ and acquired a foreign ‘domicile of choice’. Obtaining a Counsel Opinion in favour a foreign ‘domicile of choice’ will enable them to settle their non-UK situs assets into an EPT and place them permanently beyond the scope of IHT.
Some British expat clients to whom we have spoken have taken the view that the proposed abolition of the UK’s domicile regime will allow them to benefit from the new ‘10-year rule’, under which an individual who has been non-UK resident for 10 consecutive tax years will no longer be exposed to IHT on their worldwide assets. We don’t share this optimism.
The Technical Note that was published by the government on Budget Day suggests that another connecting factor may be used alongside residence or non-residence in determining IHT liability. If ‘domicile’ is abolished, then the only other criterion will be ‘nationality’. This would mean UK nationals becoming subject to IHT on their worldwide assets regardless of their place of residence, which would widen rather than narrow the scope of the existing IHT regime.
UK Prime Minister Rishi Sunak has now announced that a General Election will take place on 4 July. With the Labour Party way ahead in the polls, it seems very unlikely that a future Labour government would agree to a change that would relieve wealthy non-residents of their liability to IHT when they already pay no (or very little) income or capital gains tax in the UK.
It will only be possible to grasp the full extent of the implications of the Budget proposals when the draft legislation is published, but that may already be too late. We believe it is much safer to establish certainty under the existing regime, which is tried and tested, than to leave it to chance. Certainly, any BNO visa holders or British expats that may be impacted by the proposals should review their structures as a matter of urgency. Contact your nearest Sovereign office for further information.
