British expats: A new era of tax planning?

Changes to the UK’s non-dom regime from 6 April 2025 provide scope for British expats living abroad to undertake planning in a manner that was not previously possible under the old rules.

Under the new regime applicable from 6 April, such expats who have been living abroad for 10 years can consider valuable IHT planning and also take advantage of a new favourable 4-year regime if they return to the UK. This article considers these planning opportunities in detail below.

IHT

Under the new rules from 6 April 2025 individuals become “long-term residents” and come within the scope of IHT on worldwide assets once they have been UK tax resident for 10 out of 20 tax years. Under the previous rules British expats would have remained within the scope of IHT on their worldwide estate due to being UK domiciled, until such time that they could demonstrate that they had acquired an intention to remain in another country permanently or indefinitely. Further, many expats who had become domiciled elsewhere but returned to the UK, even if only temporarily, were within scope of IHT on their worldwide assets from at least their second year of UK residence.

Instead now, provided they have been resident outside the UK for at least 10 tax years, they will only have liability to IHT on their UK situated assets (and certain overseas assets which derive value from UK residential property) and not their foreign assets, whilst they remain non-resident and for up to ten tax years after their return to the UK. Expats should therefore minimise holding UK assets whilst they are not long-term resident and could consider gifting overseas assets as part of their estate planning without exposure to IHT while they remain abroad and for up to 10 tax years if they return to the UK.

Income tax and CGT – new 4-year regime for new arrivals to the UK

From 6 April 2025 individuals moving to the UK (who have not been UK resident in any of the previous 10 years) will be eligible to claim the new 4-year regime. Under this regime for those first 4 years of UK residence there will be no UK tax on foreign income and foreign chargeable gains (known as FIG) even if these are brought into the UK. This includes distributions from offshore trusts.

British expats returning to the UK will be entitled to take advantage of this regime if they wish, provided they have been non-UK resident for the previous 10 consecutive tax years. It will therefore be very important to check that they have not breached any UK day count allowances under the Statutory Residence Test for these previous 10 years, particularly during 2020 to 2021 when many people’s travel was curtailed owing to Covid-19 (if day counts were exceeded it may be possible to disregard a number of days under “exceptional circumstances” provisions, but this requires careful consideration). Professional advice should be sought on the application of the Statutory Residence Test if there is any uncertainty.

Claiming this 4-year regime means that British expats returning to the UK will not have UK tax exposure on foreign income and gains generated, for example, by overseas investment portfolios and also offers valuable scope for selling foreign assets after returning to the UK without a charge to UK tax. The proceeds can be brought into the UK for spending without any UK tax charge or can be kept abroad where they would remain outside the scope of IHT until the individual becomes a long-term resident.

Planning using offshore trusts

Succession planning using offshore trusts is also available to expats while they are not long-term residents. Provided they settle non-UK situated assets onto trust, there is no 20% IHT entry charge. If they return to the UK, once they become long-term residents, the worldwide assets of the trust would come within the scope of the “relevant property” regime with IHT charges on each 10-year anniversary of the creation of the trust at a maximum rate of 6% and proportionate exit charges when capital leaves the trust. They and their spouse could be excluded from benefit under the trust before they reach 10 years of UK residence to avoid bringing the value of the trust fund into their estates for IHT purposes under “gift with reservation of benefit” rules. With this timeframe in mind the settlor can plan distributions they require from the trust during their early period of UK residence and, once excluded, the trust could take on the role of providing for the settlor’s children and grandchildren.

This could substantially reduce the IHT on their estate. The periodic charges under the relevant property regime up to 6% are significantly less than the 40% charge that would otherwise apply to those assets on death if held outright. The first 10-year charge would not apply until after the settlor has been living in the UK for 10 tax years. For example, if the trust exists for 40 years, there may only be three 10-year charges equating to 18% which is less than half the IHT charge on death. Obviously trust administration costs and other tax effects need to be factored in alongside the IHT advantages, but the IHT saving achieved may outweigh these other costs.

Once UK resident, the settlor would have no UK exposure to UK tax on the foreign income and gains realised within the trust provided they are eligible for the 4-year FIG regime and claim relief under it in their self-assessment returns. Once outside the 4-year regime, or if it is not available, the settlor will be liable to UK income tax at up to 45% on all income and CGT at 24% on all gains realised within the trust. If the settlor and their spouse are excluded from benefit the income tax charge may cease to apply, but the CGT charge will generally continue for family trusts. There is a right of reimbursement from the trustee for these income tax and CGT charges. If income and gains are assessed on the settlor, there would then be no further income tax and CGT on capital distributions from the trust unless there are “pools” of accumulated income and realised gains that have arisen within the trust before the settlor became liable to tax on the trust’s income and gains. With careful planning, however, these tax pools can be managed.

Conclusion

The switch in focus from domicile to residence puts British expats on the same footing from an IHT perspective as people from other countries outside the UK tax net who wish to undertake succession planning. Moreover, for the first time expats returning to the UK are able to take advantage of a favourable income tax and CGT regime for their early period of UK residence.