By Alex Dean, Head of Family Office, Europe and Middle East at IQ-EQ, and Rob May, Director, Private Office, Life Insurance and Inheritance Tax Planning at SPF Private Clients
Following the announcement of the Autumn Budget on 30 October 2024, the UK’s tax regime for non-UK domiciled individuals and their non-UK trust structures will change from 6 April 2025 and be replaced by a new regime based on residence rather than domicile.
Most of what was confirmed in the Budget regarding UK res non-doms had been expected, but there were also a few tweaks, some of which will be welcomed by those impacted.
Importantly, the proposals do still remain in draft form, so there could be some further changes before the laws come into force.
The key changes regarding Inheritance Tax
Following is a summary of the headline changes from an Inheritance Tax (IHT) perspective:
- Individuals that have been UK tax resident for at least 10 tax years will now be classed as a Long-Term Resident (LTR). Once an individual becomes LTR, their non-UK assets will be brought within the scope of IHT
- Once an LTR leaves the UK, they will also have an IHT exposure, or ‘tail’, which will range between three and 10 years, dependent on how long they have been UK tax resident, and subject to any double tax treaties that may apply
- For non-UK trusts set up prior to 30 October 2024, when the settlor becomes LTR, the trust will be brought within the scope of the UK’s Relevant Property Regime. This could mean the trust assets are subject to IHT charges up to 6% on every 10th anniversary of the trust, when assets are distributed from the trust, and when settlor leaves the UK. Furthermore, if the settlor passes away whilst they are LTR, the trust will remain within this regime
- Non-UK trusts set up after 30 October 2024 will be subject to the same regime as non-UK trusts set up prior to 30 October 2024, but with one additional caveat. If the settlor retains a benefit in the trust, the assets in the trust will also be exposed to IHT in the event of their passing
An alternative solution: life insurance
Considering these incoming changes, it is important for impacted individuals to seek advice and explore alternative planning options or solutions that may be available to them. One such solution is life insurance.
There are various forms of life insurance available to clients, but they can be broadly broken down into two main categories:
- Policies that do not have a surrender value, or ‘pure risk’ life insurance
- Policies that do have a surrender value, or ‘cash value’ life insurance
Whilst there are significant differences between different life insurance solutions around the world, they are all designed to provide a sum to beneficiaries following the passing of the life or lives insured. This sum can then be used by the beneficiaries in whichever way they may need; for example, to pay IHT liabilities.
In the context of the UK’s incoming changes, it is important to note that policies can be set up to fund liabilities that may arise on an individual’s estate, on a lifetime gift they make, or both. Policies can be set up for an individual or a married couple, with the policy length set to last for a specific term or whole of life. The cover amount can be fixed, in which case the premium can be guaranteed whilst the policy remains in place. Alternatively, with some products, it may be possible for the cover amount to be set up to increase, to help mitigate against a future growth in asset values.
Most importantly, if an individual’s circumstances or IHT legislation changes, the policy can be adjusted. For example, the cover amount under the policy can be reduced, or the policy can be cancelled at any time.
Once set up, it may also be necessary for policies to be settled in a trust, to ensure that the sum paid out following the passing of the life or lives insured can be accessed quickly, and to ensure that no tax arises on the sum when it is paid out. This is a straightforward process to undertake, and most insurance companies will provide their own trust deeds that can be used without charge. Alternatively, individuals may opt for their lawyer to draft a trust deed.
The following case studies from SPF Private Clients highlight some real-life examples of how pure risk life insurance solutions can be used to protect IHT exposures. However, for clients who prefer life insurance that can also build up an underlying value over time, cash value life insurance solutions may be deployed instead. These solutions tend to be most attractive for clients residing in Africa, the Middle East, Asia and the United States. In addition to providing a sum in the event of the life/lives assured passing, these solutions also allow the policy to be ‘cashed in’, thus providing additional flexibility in the event of a change in circumstances.
Case study #1: Max and Laura live in the UK with their children but expect to leave
Case study #2: Costas and Marie currently live in Switzerland but own UK real estate
Case study #3: Cedric is deemed UK domiciled but his wife, Tatiana, is not
Don’t act without advice
When considering life insurance solutions, it is important to take advice from a qualified life insurance professional. It is also important for life insurance professionals to work with your other professional advisers, such as your accountant, lawyer or wealth manager, to ensure that any solutions being considered are appropriate to your wider planning.
About the authors
Alex Dean is IQ-EQ’s Head of Family Office for Europe and the Middle East, based in London. He’s an experienced industry professional with a demonstrated history of working in the investment management and private wealth industry. He has specialist knowledge in investment management, banking, and trust and estate management.
Rob May is a leading international life insurance adviser and qualified trust and estate practitioner (TEP). He acts for high-net-worth individuals, trustees and businesses based in the UK and internationally. He has more than 10 years’ experience in the high-value life insurance space, including as a director at John Jamb and at Risk Assured. He now leads the Private Office life insurance proposition within SPF Private Clients.
SPF Private Clients Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate taxation advice. Registered Office: 33 Gracechurch Street, London, EC3V 0BT. Registered in England No. 3680970.
