In a move that could significantly alter the retirement plans of wealthy Britons, the UK government’s recent budget has introduced a substantial loophole in inheritance tax (IHT) laws. Under the new proposal, those who retire abroad and live outside the UK for at least 10 years will no longer be subject to UK inheritance tax on their foreign assets. This change, expected to take effect in April 2025, marks a dramatic shift away from the current system, which taxes British expatriates on their worldwide wealth, regardless of where they reside or die. The new residency-based tax system is poised to benefit tens of thousands of expatriates who have already moved abroad or are considering a move in the future. However, experts caution that this change could spark a significant migration of wealthier individuals out of the UK, with potential long-term economic consequences.
The Key Changes in Tax Rules
The UK’s inheritance tax system has long been based on an individual’s domicile status, rather than their residency. Under the existing rules, anyone who is domiciled in the UK is required to pay inheritance tax on their global assets, even if they have lived abroad for many years. For example, if a wealthy individual moves to a foreign country for their retirement but still maintains a UK domicile, their worldwide wealth, including properties and investments held outside the UK, would still be subject to inheritance tax.
However, the new proposal announced in the UK’s Autumn 2024 budget marks a significant change. Starting in April 2025, the government will replace the domicile test with a residency-based system. This means that individuals who live outside the UK for a period of 10 years or more will no longer be liable for inheritance tax on their foreign assets. According to the Financial Times, this loophole will immediately benefit tens of thousands of British expatriates who have already moved abroad and could also influence the future retirement choices of many more.
“Alexandra Britton-Davis, partner at accountancy firm Saffery, suggested it could influence retirement location choices between ‘the south of England or somewhere warmer where they don’t have IHT,'” the Financial Times reports. This could potentially make countries with warmer climates and more favorable tax regimes, such as Spain, Portugal, or the British Virgin Islands, increasingly attractive to affluent retirees.
The Impact on Expatriates and Future Retirees
The immediate effect of the new rules is that tens of thousands of British expatriates who have already relocated will benefit from the changes. These individuals, who may have previously been on the hook for UK inheritance tax on their overseas assets, will now be exempt from the charge if they have spent the last decade abroad. As an example, the well-known entrepreneur Richard Branson, who has lived on Necker Island in the British Virgin Islands for nearly 20 years, could see a significant reduction in his estate’s tax liability under the new rules.
The new regulations are set to create a clear incentive for wealthy Britons considering retirement options to choose countries with no inheritance tax or lower tax rates. This may cause a shift in the global retirement market, with more high-net-worth individuals flocking to locations that offer both a desirable lifestyle and favorable tax environments.
Maxwell Marlow, from the Adam Smith Institute, voiced concerns over the potential long-term effects of such changes. “The abolition of the non-dom regime will drive away highly mobile wealth creators, and so their tax contribution will decrease, and they will invest less in our economy,” Marlow warned. While the shift is designed to make the UK’s tax system more attractive to international talent and investment, there are valid concerns about its potential to decrease tax revenue from the wealthy and erode the country’s economic base.
Economic Implications and Potential Risks
The shift from domicile to residency for inheritance tax purposes has not been without controversy. While the policy change aims to make the UK a more attractive place for international talent and wealth, it could also drive away some of the country’s wealthiest residents. The Office for Budget Responsibility predicts that 12% of non-doms, who will no longer be eligible for the current tax regime, could decide to leave the UK as a result of these changes. This is an increase from 10% under previous proposals.
Rachel Reeves, the UK’s Shadow Chancellor, defended the government’s decision to introduce the residency-based tax system. “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,” a Treasury spokesperson said. “This will ensure everyone who is a long-term resident in the UK pays their taxes here.”
However, the shift in tax policy raises questions about its long-term impact on the UK economy. Many critics argue that the government’s focus on attracting foreign investment and wealthy individuals could inadvertently reduce the tax contributions of domestic wealth creators, whose investments are vital to the country’s economic growth. If a significant number of wealthy individuals choose to relocate to other jurisdictions, the loss of tax revenue could exacerbate the UK’s fiscal challenges, which include a £22 billion shortfall in public spending.
A Global Trend in Tax Competition
The UK’s new residency-based system is part of a broader global trend toward tax competition, where countries adjust their tax policies to attract wealthy residents, investors, and entrepreneurs. Countries like Monaco, Switzerland, and Singapore already have tax systems designed to appeal to high-net-worth individuals, offering low or zero inheritance taxes, as well as other benefits.
While the UK aims to compete with these nations, it must also weigh the potential risks of losing homegrown wealth creators. The government has suggested that the new system will raise £12.7 billion over the next five years, which could help plug the fiscal gap and support public services. However, this optimistic projection hinges on the assumption that the UK can attract enough foreign investment and talent to offset any losses from domestic wealth migration.
