When you pass away, you may want to leave specific assets to specific people or charities, but having to pay Inheritance Tax may reduce the amount your loved ones receive upon your death. Whether you have a plan in place already, or are just beginning to consider planning, the UK Government has announced significant changes to the Inheritance Tax (IHT) system that you will need to consider.
What is Inheritance Tax?
Inheritance tax is paid on any assets you leave to family or friends when you pass away and is due on any estate that is worth more than the annual IHT allowance. Your estate includes everything you as an individual owns such as heritable assets (e.g. houses, land and buildings) and moveable assets (e.g. money in the bank, shares, some insurance policies, furniture and personal effects). It can also extend to gifts made while you were still alive.
It is advisable for individuals to plan for the future with Inheritance Tax planning strategies, ensuring that your assets such as money, property and land can be passed to the next generation.
Currently, IHT is determined by an individual's domicile status, i.e the law of the country that they are most closely connected with. However, under the new regime, IHT will shift to a residence-based system, altering the scope of assets subject to UK IHT for both individuals and Trusts.
What are the upcoming changes to IHT?
Under the proposed changes, non-UK assets will be brought into the scope of UK IHT if an individual has been a UK resident for at least 10 of the 15 years preceding the tax year in which a chargeable event, such as death, occurs.
Additionally, individuals who leave the UK will remain within the IHT scope for 10 years following their departure. The government is currently engaging with stakeholders to refine this new residency test to ensure it is fair and comprehensive.
Another significant change is the planned termination of Excluded Property Trusts, which have been commonly used to shield non-UK assets from IHT. The government aims to reform how IHT is levied on non-UK assets held in such trusts, ensuring that long-term UK residents pay IHT on worldwide assets.
Recognising the complexity of existing Trust arrangements, the government is considering how to implement these changes with minimal disruption, providing transitional measures for affected parties.
Key changes and effects to the Inheritance Tax system from April 2025:
Worldwide assets will be subject to UK inheritance tax, including any residential property held globally, if the deceased has resided in the UK for the last 10+ years
Non-domiciled individuals who are long-term residents in the UK will be treated as UK domiciled for inheritance tax purposes
Individuals leaving the UK will still be subject to IHT for 10 years post-departure.
Details of the new rules, including transitional provisions, will be confirmed in the forthcoming Budget after further stakeholder engagement. However, the government has indicated that there will be no formal consultation on the shift to a residence-based IHT system, instead relying on feedback from ongoing discussions.
What should you do?
Even with these changes, you can still ensure that your family, loved ones and preferred charities benefit from your estate by speaking with an experienced advisor.
It is essential for individuals and Trustees to review their current arrangements and seek professional advice from experienced Private Client advisors like Burnett & Reid to understand the potential impact of these changes on their Estate planning.
Our Private Client team have been assisting individuals and families in Aberdeen and the North East secure their wealth for generations, and we’d love to help you too. Get in touch today.
