Non-dom IHT changes and the impact for US persons with UK connections

In the UK Autumn Budget, the Government announced a comprehensive reform of the UK's “non-dom” tax regime, which will be introduced from 6 April 2025. The "non-dom" status will no longer be relevant because the domicile-based approach for assessing liability to UK inheritance tax (“IHT”) will be replaced by a new residence-based test. This will have a major impact on the UK IHT landscape.

For US persons (or anyone with US tax ties) who are either residents of, or have connections to the UK, these changes could have significant implications for their UK IHT position on death. It is important to take professional advice early on from advisors in each jurisdiction, to understand whether the new rules in the UK could impact existing planning.

The current UK IHT regime

In Scotland and the rest of the UK, it is currently your domicile which determines whether your assets are brought into the UK IHT net on your death. There are broadly two ways in which a person can be domiciled in the UK – domicile at common law and statutory deemed domicile.

Domicile is distinct from tax residency. It is possible to be a tax resident of the UK but not domiciled here (and vice versa). A person is domiciled in the UK under the common law if they have either a domicile of origin (acquired at birth from their parents or the country to which they are most closely connected) or a domicile of choice (acquired through having a fixed and settled intention to live here permanently) in the UK. They are deemed domiciled here under current rules if they meet the statutory deemed domicile test which, like the new system, is based largely on tax residency.

In either case, if you are domiciled in the UK then, under current rules, your worldwide estate will be liable to UK IHT on your death. If you are not domiciled here, then you are “non-dom” and only your UK sited assets will be exposed to UK IHT.

Proposed changes to non-dom status

From 6 April 2025, the concept of domicile will be abolished for UK IHT, and a new residence-based system will be introduced.

Under the new system, the worldwide estates of even so called “non-doms” will be subject to UK IHT if they had been a UK resident for at least 10 of the last 20 tax years before their death (a "Long-Term Resident").

A person will remain a Long-Term Resident for as long as they retain tax residency in the UK. They will also remain a Long-Term Resident for a period after ceasing to be tax resident the UK. The length of time that they retain this status will depend on how long they were tax resident in the UK for. If they had been UK tax resident for between 10 and 15 years, for example, they will be subject to UK IHT for up to 5 tax years following their exit.

Long-Term Residency for UK IHT can remain attached for up to a maximum of 10 years after a person loses their tax residency in the UK. Under the current deemed domicile rules, the IHT tail can remain attached for up to 6 tax years.

The other side to the coin is that a person who is domiciled in the UK under the common law, will not pay UK IHT on their worldwide assets, provided they do not meet the residency test.

Assets situated in the UK will remain within the scope of IHT, regardless of the owner’s residency.

What does this mean for US persons?

For those with US connections, these changes could be particularly impactful. We understand that US citizens and domiciliaries can be subject to US estate tax on their worldwide estate, regardless of where they live, if the value of their estate exceeds a certain threshold.

If they have been tax resident in the UK for 10 of the last 20 years, US citizens could face double taxation on their estates on death, as we understand they could still be required to pay US estate tax on their worldwide estate while also being brought into the UK IHT net (which would tax their worldwide estate, too). There may be reliefs and/or credits which can be claimed under the UK-US Double Tax Treaty to reduce the tax exposure.

Such individuals may continue to be caught by the UK IHT net for as long as 10 years following their exit from the UK.

Conclusion

The proposed reforms to the UK's non-dom rules mark a significant shift in the IHT landscape for those with ties to the US and elsewhere. It is important for those with international ties to consult with professionals across borders at an early stage, to understand how the changes may impact their own estate and tax planning.

Brodies' wills and estate planning lawyers can advise on Scottish matters, as well as English wills and probate. Our personal law team is highly experienced in working with individuals who have connections in the US and UK. To speak with a member of our team, please get in touch.