The UK government expects to grab approximately £2.35 billion annually from changes to the taxation of non-domiciled individuals, particularly through far reaching reforms to inheritance tax (IHT).
Up to now the thousands of Kiwis and Aussies that each year headed off to the UK to work enjoyed being considered resident but non-domicile for UK tax purposes. Generally, this meant assets held offshore were not considered for UK taxes and IHT unless the assets or income were brought into the UK. The non-domicile exemption lasted until they had been resident in the UK for 15 years. Under the exemption when they came back to New Zealand or Australia their non-UK assets would not be subject to UK IHT. All UK based assets over £325,000 are subject to UK IHT, regardless of whether you live in the UK or not. Oh, and the kicker is that UK IHT is 40% of the assets above the threshold.
From 6 April 2025, the UK will:
- Replace its long-standing domicile-based inheritance tax (IHT) system with a residence-based approach
- Shorten the length of time you need to be in the UK to qualify for paying inheritance taxes on your worldwide assets
- Expand the amount of time that you need to be outside of the UK before you are outside of the scope of the UK IHT regime
The new residence-based system will catch a lot more people
Under the new rules, an individual will be considered a “long-term resident” and subject to IHT on their worldwide assets if they have been UK tax-resident for at least 10 out of the last 20 tax years. That means all your worldwide assets will be included in your UK IHT even if you acquired these assets before arriving in the UK.
If caught you’ll be liable for IHT for a long time after leaving the UK
Previously, non-domiciled individuals could leave the UK avoid IHT on non-UK assets. Additionally, UK domiciled individuals could leave the UK and after 3 years have no IHT on non-UK assets. This meant that if you transferred all your assets outside of the UK you would have no UK IHT once outside these time frames.
The new rules introduce a longer tail provision. Long-term residents will be liable for UK IHT on worldwide assets for up to 10 years after leaving the UK.
There is no protection in New Zealand under the double tax treaty
New Zealand does not have inheritance taxes, and there are no specific carve outs in the double tax treaty between the UK and NZ for inheritance taxes. This means that it is only covered by general double tax treaty principles, and therefore the full amount of UK IHT will be payable as there are no offsets in New Zealand.
Setting up or having a trust in New Zealand will not necessarily help you
Non-UK assets, previously outside the scope of IHT for non-domiciled individuals, will now be included for long-term residents. New Zealand trusts settled by UK long-term residents will become subject to IHT charges, including periodic charges of up to 6% on the value of non-UK trust assets.
Things get worse from 2027 when pensions are counted for IHT in the UK
At present pensions are excluded from IHT in the UK. This has led to people piling significant amounts of funds into their pension schemes to allow for these assets to be passed IHT free. However, from 6 April 2027 the exclusion for pensions will be removed.
These changes necessitate careful planning for New Zealanders and Australians in the UK, especially those approaching or exceeding the 10-year long-term residence threshold. It’s crucial to review and potentially restructure existing estate plans and offshore arrangements, particularly now with the .
The UK government has announced a consultation to refine the operation of these new residence-based IHT rules, particularly regarding transitional arrangements and trust treatment.
Conclusion
The abolition of non-domicile tax status in the UK represents a seismic shift in tax policy, with significant implications for inheritance planning. Kiwis and Australians living in or considering a move to the UK must be aware of these changes and seek professional advice to navigate the new tax landscape effectively. As the implementation date approaches, staying informed about any further developments or clarifications in the rules will be crucial for effective estate planning.
