It is highly unusual for a UK budget to give us an opportunity to significantly reduce our tax liabilities. The budget of the 30th October 2024 has done exactly this, and by following a few basic steps it is easy, for those of us who have lived outside the UK for more than 10 consecutive years, to benefit greatly.

Background

The UK currently has an Inheritance Tax system where the estate of the deceased is assessed based on worldwide assets if they were considered domiciled in the UK at the time of death. The term domicile and its meaning has been the important factor to consider up to now, and in the UK has a different meaning to “resident” or “residency”.

There is no need for us to go into the definition of domicile here, as the budget has changed the basis for Inheritance Tax (IHT) assessment to a “residency” test, which has also simplified the tax system.

“Residency” Basis

If you have lived outside the UK for more than 10 consecutive years, your non UK assets will not be liable to UK IHT. The rule is as follows –

From 6 April 2025, the test to determine whether non-UK assets are within the scope of IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) occurs.

(Editorial Note. Some other press and advisers are stating it is 10 years, not more than 10 years, outside the UK. This applies to a different tax in the Budget, not IHT).

To meet the rule it is necessary to have been out of the UK for more than 10 years, because of a Split Year rule for taxation that will also apply. Again, there is no need to go into detail here, suffice to know that we need to be out of the UK for more than 10 years in the last 20.

How beneficial is the change to “residency basis” of assessment?

The benefit will depend on our personal circumstances, where our assets are based and the value of our assets.

I have used a case study to illustrate –

Mr & Mrs Ingles

– More than 10 consecutive years out of the UK in the last 20 years

– Assets outside the UK include Spanish compliant bonds, bank accounts, QROPS pension and property, all jointly owned, as follows:

Spanish bank accounts €98,000

Spanish compliant bonds €290,000

House (mortgage free) €525,000

QROPS pension €178,000

Total €1,091,000

– UK assets £325,000 jointly owned

Mr and Mrs Ingles can return to the UK and if death occurs within 10 years of the return the following will apply.

– UK assets assessed for UK IHT fall within the UK nil rate band. Tax due £0
– Assets outside the UK not assessed under the residency basis €1,091,000

At the time of writing the exchange rate would give a value to the non UK assets as £865,814. The savings from not having these assets taxed in the UK would be £346,325.60. (£865,814 * 40%)

How to save UK IHT when living in Spain – top six tips

1. Take professional advice
2. Don’t move back to the UK until you have more than ten consecutive years out of the UK
3. Keep your non UK investments outside of the UK outside if you qualify under the new residency test
4. Consider moving excess UK funds to non UK investments. For example, ISAs are taxable in Spain and there is now merit in disposing in favour of non UK assets
5. Pensions in the UK are liable to IHT from April 2027 and it is therefore doubly important to keep non UK pensions beyond the scope of IHT
6. When drawing income or capital from your investments and pensions, take advice on the manner and order in which you do this, as it makes a difference to your IHT exposure and also how long your savings will last

And here is the icing on the cake

Complete more than 10 consecutive years outside the UK, return to the UK and be unfortunate enough to pass away in the next 10 years, and your estate will get the additional benefits (on top of being IHT exempt on non UK assets):

• If you and your spouse were both long term non resident, you will receive the spousal allowance – 100% IHT free transfer of your assets to your spouse if directed by your Will
• Each spouse receives an IHT allowance of £325,000 with only UK assets above this amount being taxed
• If you have a main residence and your total individual wealth is less than £2M you will get the main residence relief of £175,000

If you pass away outside of the UK and your beneficiaries are in the UK, they will pay no UK IHT if you have met the long term non resident criteria. This is because your non UK assets will not be taxed in the UK. As the UK government taxes your estate, not the beneficiary receiving the bequest, no IHT will be payable.

And because you live in Spain, your UK based beneficiaries will be assessed on residency and as they are outside Spain they will not have to pay Spanish IHT on non-Spanish assets.

Conclusion

The changes to UK IHT rules are hugely important for those of us living outside the UK. It may be possible to leave anything from tens of thousands pounds (or euros) to hundreds of thousands to our family and/or worthy causes.

There is a great deal of planning that can be completed to get the best outcome for you. It will depend on your personal circumstances. However, as a principle, it is better to start this planning sooner rather than later.

To start a conversation book a call with Barry Davys using his online system. This allows you to choose a time that is convenient for you for the call which can be either a phone or video call.

Source: HMRC, UK Gov 30th October 2024

Notes

This article is for general information purposes only. Professional tax advice must be taken before undertaking planning to benefit from changes to the UK IHT system.

The content is based on our understanding of legislation at 25th November 2024

The policy paper issued by HMRC as part of the Budget becomes law when the Act of Parliament has been passed.

You can find out more about Barry Davys of The Spectrum IFA Group and his clients by clicking Barry Davys IFA