Understanding the Upcoming Inheritance Tax Changes
Inheritance Tax (IHT) can often be a complex financial issue for many families to navigate, especially with the upcoming changes set to take effect from next month. To help demystify these updates and their potential impact on your family, here are the four significant upcoming changes to IHT expected to take effect in the next few years:
New Residency-Based Tax: Starting in April 2025, a new residency-based tax will be introduced. This means that individuals who have been resident in the UK for 10 of the last 20 years will be subject to IHT on their worldwide assets. Non-residents will only be taxed on their UK assets. Even those planning to leave the UK will still be taxed on worldwide assets for up to 10 years. This rule change is set to affect approximately 9,300 individuals per year.
Farms and Businesses: From April 2026, certain farms and businesses will fall within the scope of IHT. This change aims to ensure that these assets are taxed appropriately, reflecting their value and contribution to the economy.
Pensions: Beginning in April 2027, pensions will be included under IHT. This means that pension funds will be subject to inheritance tax, potentially impacting the financial planning of many families.
IHT Threshold: The freezing of the IHT threshold is due to end in 2030. As a result, by 2030, the number of families paying IHT could double to one in 10 UK families facing this significant tax, which is currently charged at a rate of 40%.
The first adjustment coming into play next month involves the end of the 'non-domiciled (or non-dom) status' exemption. Individuals will no longer be exempt from paying IHT on their foreign assets based on their non-dom status. Instead, tax will be based on their residence. A new 'Long-Term Resident' (LTR) rule is being introduced, which means that anyone who has been resident in the UK for 10 of the last 20 years will be subject to IHT on their worldwide assets. Non-LTRs will only be taxed on their UK assets.
For instance, the incoming legislation will impact those with offshore trusts, which were traditionally excluded from IHT. Under the new rule, if the settlor, the person adding to the trust, qualifies as an LTR and leaves the UK, the trust will still be liable for IHT for 10 years and it will be subject to exit charges.
Naturally, everyone affected will want to keep the potential bill as low as possible, but with various previous loopholes closing, it's not going to be easy. Preparing in advance could really help your loved ones down the line.
If your are concerned about Inheritance Tax or wish discuss your own estate planning please do not hesitate to get in touch via the link below.
