Leading up to the announcement of the UK Autumn Budget, a lot of what was speculated to be introduced as part of the new Labour government’s plans did come to fruition, but there were also a few surprises.
From the perspective of British expats living in Hong Kong and thinking of staying there (or remaining non-UK tax resident in the future), to those who are planning to return to the UK at some stage – the new Budget legislation offers some interesting planning opportunities.
British Expats not planning to move back to the UK
For those who are not planning to return to the UK in the future, some of the new Budget legislation may be seen as a positive – particularly from a UK Inheritance Tax perspective.
Historically, a person’s UK Inheritance Tax (IHT) exposure was based on their ‘domicile’ position on death, which was quite subjective in itself. The new system appears to be cleaner cut, with a residency period-based approach.
For individuals who have been non-UK tax resident for more than 10 years and plan to remain so permanently, they no longer need to worry about the burden of proving they are ‘non-UK domicile’. Under the new rules, they will be regarded as a non Long Term Resident (LTR). Instead as a default only their UK assets above their UK IHT exempt amounts will be subject to UK IHT, whilst their non-UK assets won’t be.
The previous domicile concept
Under the previous domicile concept, for British expat clients who had been non-UK tax resident for more than 10 years but had not permanently settled elsewhere, and perhaps retaining some UK assets or making regular trips to the UK, the possibility of them removing their UK domicile and having a domicile of choice in Hong Kong for example was not clear cut.
This also impacted those who did not have strong enough ties to Hong Kong whilst not planning on moving back to the UK, or for those whose plans were not set in stone on remaining in Hong Kong for the rest of their lives.
The issue then of having to sell all their UK assets, limiting visits back to the UK and committing to Hong Kong as their home for the rest of their lives was not ideal or even possible for some expats.
With the residency approach this is no longer a concern, which is good news to many. From this new residence regime, it will be more beneficial to look at where you hold most of your assets and wealth, with a great opportunity to really look to minimising your UK IHT exposure.
British expats planning to move back to the UK
With the confirmed introduction of the Foreign Income and Gains (FIG) relief, British expats who have been out of the UK for more than 10 consecutive tax years and are planning to become UK tax resident in the next tax year, can benefit from FIG by not being subject to UK Income and Capital Gains Tax on their foreign income and gains, having made a relevant claim.
This can be great for anyone who fits into this category and are only planning on a short term stay in the UK, and even for those who plan a long-term return, the four-year window at least can help reduce the tax burden in the early years back in the UK. Although please be aware there are some exceptions to this, which you should check with a tax adviser.
Unfortunately for those who haven’t been out of the UK for 10 consecutive tax years, and are planning to move back to the UK, the FIG regime will not be available to them.
Care should be taken on a return to also consider your long term resident position for IHT purposes; the new residency-based test sees an individual fully within the scope of UK IHT once they have been UK resident for 10 out of the previous 20 tax years.
The new regime makes it all the more important to do as much planning as possible before they do become UK tax resident to help minimise future UK tax exposure, and possibly consider delaying that move.
UK pensions and UK Inheritance Tax
Whilst there was some talk about possible changes to UK pensions, a lot of people were surprised when the Labour government announced UK pensions, which were previously exempt from UK IHT, will now form part of a person’s estate.
A lot of people had previously earmarked their pension pot as a significant portion of what they were planning to leave to their chosen beneficiaries on death free of UK IHT. Now, the planning on this needs to be drastically re-thought – and this is an area of financial planning our team can help with.
Trusts for previous non-UK domicile individual
For any previously termed ‘non-UK domicile individuals’, such as Hong Kong BNO passport holders who set up ‘Excluded Property Trusts (EPTs)’, the Trusts IHT position will now directly link to the living settlors Long Term Resident position (LTR). Living settlors who are not LTR’s will keep Trust assets outside the scope of the UK IHT regime for Trusts, whereas living settlors who are an LTR will see Trust assets subject to the UK IHT regime for Trusts. These UK IHT charges could apply at 10-year anniversaries or if funds are withdrawn from the trust, or the settlor ceases to be an LTR.
For Trusts settled before 30 October 2024, there has been grandfathering in respect of the Gift With Reservation of Benefit (GWROB) rules for EPTS. This is where a Trust comes within the UK IHT regime because of the settlor becoming an LTR, the value of the trust will not form part of the settlors death estate.
Some merits of retaining ones EPT remain, however with these new rules and possible IHT charges in place it is a worthwhile reason to speak to an adviser to understand how these taxes will apply, especially if you plan to stay in the UK long term. An adviser can also explain all the other type of UK IHT planning options to consider.
Spousal and civil partner’s positions not aligned
Under the new LTR test, it will be important to consider not only your position and scope of IHT, but also your spouse or civil partner’s. For lifetime gifts or where these statuses are aligned, the spousal exemption will apply – meaning gifts are exempt from IHT. However, where these are not aligned, IHT might be due and it will be important to seek advice, consider the implications and consider elections available.
Speak to an adviser
In short, the UK Autumn Budget has brought about some of the biggest changes in UK tax legislation, and the areas mentioned are just a few of the highlights.
Now is a good time to book an appointment with your financial adviser to understand the changes, how they pertain to your personal circumstances, and to make sure you organise your financial affairs to help mitigate your tax exposure and where you can maximise your tax efficiency.
Please note
The information contained within this document is subject to the UK tax regime and is therefore primarily targeted at persons based in the UK, UK expats or those thinking of moving to the UK.
This article is distributed for educational purposes and should not be considered financial or tax advice.
This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
