UK IHT Reform: Implications of the New Residence-Based Framework

UK IHT Reform: Implications of the New Residence-Based Framework

The UK government's proposal to reform Inheritance Tax (IHT), announced in its Spring Budget 2024, represents a fundamental shift in wealth planning for individuals and families from Latin America with a UK footprint. The reform's core is the replacement of domicile, a complex and often ambiguous legal concept, with a clearer criterion based on tax residence. This modification accelerates the exposure of worldwide assets to IHT and demands an immediate review of asset holding structures and long-term succession plans.

Under the current regime, non-domiciled individuals in the UK are only subject to IHT on their UK-situs assets. Worldwide asset exposure is triggered only when they acquire 'deemed-domiciled' status, typically after residing in the country for 15 of the last 20 tax years.

The proposed reform would eliminate this system, introducing a new threshold: an individual would become subject to IHT on their worldwide estate after 10 years of UK residence. Additionally, a 10-year 'tail' provision is contemplated, meaning an individual leaving the UK would remain within the scope of IHT for a decade after their departure.

Impact on Trust Structures

One of the greatest areas of uncertainty concerns the treatment of trusts, particularly Excluded Property Trusts (EPTs). Historically, non-domiciles could settle non-UK assets into an EPT before becoming deemed-domiciled, perpetually shielding them from IHT. The government has launched a consultation period to define how the new rules will apply to trusts established under the previous regime.

The possibility that the protection of these EPTs could be eroded or eliminated introduces significant volatility for many established wealth structures held by Latin American families. The future effectiveness of EPTs will depend on whether the IHT charges on the trust are determined by the settlor's status at the time the trust was created or at the time a taxable event occurs, such as a distribution or the trust's ten-year anniversary. This distinction is critical and will define the future viability of such vehicles for inter-generational wealth protection.

Strategic Considerations and Next Steps

The new ten-year residence threshold, considerably shorter than the previous 15-year rule for 'deemed domicile', compresses the timeline for strategic wealth planning. Newcomers to the UK from Latin America will have a much shorter window to organize their affairs before their global assets fall within the IHT net. This accelerates the need for early and sophisticated advice on asset structuring, location of assets, and the use of appropriate vehicles.

For current and future clients, the consultation period offers an opportunity for proactive analysis and scenario modeling. Family offices and their advisors must evaluate the resilience of existing structures under a residence-based system. It will be crucial to review asset location, trust governance, and succession plans to align them with the new UK fiscal paradigm. Inaction during this transitional phase could result in significantly greater and unforeseen tax exposure for global estates.