UK Domicile: what should long term UK expats do now?

By Howard Bilton – Sovereign Group Chairman and Founder.

In the Spring budget, UK Chancellor Jeremy Hunt announced the abolition of the remittance basis for income tax and capital gains tax for non-UK domiciled individuals who are resident in the UK – the so-called ‘Non-Dom Regime’ – with effect from 6 April 2025.

Broadly, he proposed that new foreign residents of the UK will only be exempt from UK tax on their ‘foreign income or gains’ (regardless of whether they are brought into the UK) during the first four years of UK tax residence. After four years, they will taxed on their worldwide income and capital gains.

There are transitional arrangements for those who are already resident but not domiciled in the UK, but they too will be brought into the worldwide UK tax net sooner rather than later.

At the same time, Hunt announced a consultation on changes to the UK’s inheritance tax (IHT) regime, which is currently based on domicile and is charged at 40% on the total value of the deceased’s estate (after exemptions). He suggested that the government is considering making liability to IHT dependent on residence rather than domicile, with those who have resided in the UK for ten years or more paying IHT on their worldwide estates.

If those who have resided in the UK for 10 years become subject to IHT, it would seem logical that those who have resided outside the UK for 10 years would lose their liability to IHT. This might mean that long term UK expats would no longer need to prove that they have shed their UK ‘domicile of origin’ and acquired a new ‘domicile of choice’ outside the UK in order to lose their liability to UK IHT.

Noticeable by its absence, however, is any suggestion that the new measures would include anything making it easier to reduce liability to IHT. The government appears to have left open the possibility that holding UK nationality – a British passport – could become the key connecting factor alongside long-term UK residence or non-residence.

A Conservative government might indeed simplify the rules in this way, but it does seem unlikely that measures brought in to increase tax revenue would at the same time include provisions that would release IHT liabilities for many of the five million UK citizens living abroad, many of whom will have been non-UK resident for over 10 years but remain UK domiciled.

We have commented before about the fact that whenever the UK government has previously increased the tax on non-doms in the UK, HMRC’s own figures show that the tax take decreases. Jeremy Hunt believes that removing non-dom status will increase tax revenue by £2 billion but that obviously assumes that all current non-doms will stay in the UK and pay the full rates of tax. They won’t. They never have when the tax has increased.

High net worth individuals are generally highly internationally mobile individuals. 100% of those we have spoken to say they will be leaving the UK or at least becoming non UK tax resident to avoid the charges. We don’t believe that these measures will raise any extra revenue. In all probability this will result in a net loss to the UK exchequer.

There is also a general election on the near horizon. It seems to us to be entirely illogical that a new Labour government (which appears to be certain) would introduce new legislation that would allow British expats to lose their liability to UK IHT completely with little or no formality other than the length of time they have spent living abroad.

Long term UK expats are rarely Labour voters so a Labour government is unlikely to want to gift them any favours. We think it is much more likely that it will extend the scope of UK IHT to include anybody who holds a UK passport.

So, what should long term British expats do? Before the Budget, Sovereign was recommending planning that involved obtaining Opinion that confirmed that the client had shed their UK ‘domicile of origin’ and had acquired a new ‘domicile of choice’ in their current place of residence.

To obtain such an Opinion, you should be able to demonstrate that you have lived in your current country of residence for an extended period (typically a minimum of six or seven years) and, most importantly, that you have formed the intent to remain there indefinitely.

With that Opinion in hand, the advice to clients was then to transfer as much wealth as possible into offshore trusts because the assets transferred would then be excluded from UK IHT forever. The expectation is that any such transfers into trust completed before 6 April 2025 will be governed, and will remain governed, by the existing IHT regime based on domicile.

Such planning cannot be undertaken without a relevant Opinion unless the expat is prepared to risk being charged 20% of the value of the assets going into trust (plus penalties) if HMRC claims that they were UK domiciled at the time of the transfer. The Opinion is essential to protect the (non) tax filing position and to avoid the risk of penalties for non-filing and non-payment of tax.

In our view, this is still the best planning available. If a new Labour government acts as we expect – by removing the potential for British expats to shed their UK domicile – this planning will no longer be available.

We don’t think that a policy of ‘wait and see’ is sensible. The worst-case scenario is that the planning will turn out to be unnecessary. But the cost will be inconsequential compared to the potential IHT bill if this planning is no longer available. If necessary, this planning could be unwound.

In short, our very strong recommendation is to assume the worst and hope for the best. Any long term UK expats should take action now by transferring as much as possible into trust while it is still possible.