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What should UK expats know about changes to inheritance tax from 2025?

UK expats must prepare for substantial changes to inheritance tax (IHT) coming into effect in 2025. The budget has outlined a shift from domicile status to residency criteria, affecting how IHT is applied to British nationals living abroad. As it stands, individuals with long-term residency in the UK will see their worldwide assets subjected to a staggering 40% tax on values exceeding £325,000. This shift means that some expats may still be liable for UK taxes even after moving overseas, necessitating an urgent review of estate planning strategies. Residents in countries like Portugal, where many expats settle, should particularly take note of these developments. Under the new rules, the tapering allowance could prolong liability for years, complicating matters for those who have established lives abroad. Expats will need to adjust their investment portfolios and potentially their wills to align with these new tax obligations. Inheritance planning is crucial to minimising tax liabilities and protecting assets for future generations. Now is the time for expats to consult with financial advisors about their estate plans to ensure compliance and efficiency. Insight into the evolving landscape is vital for sound financial decisions. Should you require assistance in understanding how these changes may influence your financial planning, contact Robert Webb at Chase Buchanan for expert guidance.

Tuesday, 10 December 2024 - Fiscal
What should UK expats know about changes to inheritance tax from 2025?
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Budget

In the recent UK budget, two announcements were made that could have profound implications for British expats.


1. Domicile and UK Inheritance Tax (IHT)

Currently IHT is payable on the value of your worldwide assets (including Portugal) if you are a UK domicile. This is an outdated and complex principle that is about to be abolished. From April 2025, the domicile criterion will be replaced by a residence criterion.
The new criteria is divided into two parts:

  1. If you have been resident in the UK for more than 10 of the last 20 years, you will be classified as a long-term resident and will be subject to IHT on your worldwide assets. Tax will be 40% on asset value over £325,000. This applies to those who have recently arrived in Portugal
  2. The liability could last for 10 years after departure from the UK, but there is a tapering allowance called a tail. This applies to everyone currently residing in Portugal. Some examples:
  • Tax resident in Portugal for 10 or more years - no longer subject to UK inheritance tax except on UK assets if they are valued at more than £325,000
  • Tax resident in Portugal for 8 years - liability will last for another 2 years on your worldwide assets
  • Tax resident in Portugal for 4 years - liability will last for another 6 years on your worldwide assets

 

2. Pensions and UK IHT

Currently, there is no IHT payable on UK pension funds in the event of death. Everything changes! From April 2027, 40% IHT will be deducted from UK pension funds, even if you are living outside the UK.

  1. During the tail period, your pension fund will be included in your worldwide asset value
  2. After the tail has expired, only YOUR UK assets will be taxable and this obviously includes the pension value as long as the combined total is over £325,000
  3. If death occurs after age 75, not only will 40% IHT be payable on the pension fund, but UK beneficiaries could potentially pay income tax on the amount they receive. This amount could also be 40%!

These two new announcements on the UK's October 2024 budget are likely to have a significant impact for UK expats. If you require further information, please contact Robert Webb at Chase Buchanan, who is an expert in this area and can assist you.

Robert Webb - Private Weath Manager - robert.webb@chasebuchanan.com - +351 913 711 370 - chasebuchanan.com

 

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