As you would expect, with offices in both the UK and Australia, we are always looking out for legislative changes that could affect your financial planning arrangements.
Many of our clients have assets in both countries, and if this describes you, then you will likely be affected by such changes to financial and taxation rules, regardless of where you are actually living.
A good example of this is the UK Budget statement made in October 2024, which included key announcements about changes to both non-dom status, and the treatment of UK-based pension funds in respect of Inheritance Tax (IHT).
In this article, you can read about what those changes are, and how they could affect your estate planning arrangements.
Changes to domicile status mean that you could be liable for Inheritance Tax on your non-UK assets
At the heart of the announced changes is a move away from the previous domicile-based framework to a new residence-based system, which came into force on 6 April 2025.
If you’re an Australian living and residing in the UK, this could affect your estate planning strategy.
Under the previous framework, you were taxed according to your domicile status and the type of income you were earning.
You could have claimed to be taxed on your foreign income on a remittance basis, which would have meant that you were only taxed on your UK income and gains, along with any overseas income remitted to the UK.
As a result, when you returned to Australia, you would have only had to be concerned about taxes on your UK-based assets.
Likewise, your liability for IHT on assets held outside the UK depended on whether you were UK-domiciled under the previous rules.
That has now changed, so residence is now the defining factor when it comes to IHT on non-UK assets.
A key point to bear in mind is that you will be classified as a long-term resident once you have lived for 10 out of the previous 20 tax years in the UK.
When you have reached this position, all your assets, including those in Australia, will be subject to IHT from the start of year 11 of your UK residence.
You will need to be aware of the new Inheritance Tax “tail”
When it comes to your IHT liability, you will need to be aware of the introduction of a so-called IHT “tail” by which your liability will be assessed.
Even if you have been a non-UK resident for 10 years, you will not automatically become exempt from IHT on your worldwide assets.
Instead, there will be a tail period, lasting between three and 10 years, subject to how many of the preceding 20 tax years you were a UK resident before leaving.
During your tail period, your worldwide assets will remain subject to UK IHT. Once your tail period finishes, you will only be liable for IHT on your UK-based assets.
The changes mean you may need to review any trust arrangements you have
If you were non-UK domiciled under the old framework, you may have put trust arrangements in place to protect your non-UK assets from IHT.
However, it’s important to note that the changes announced have also altered how such trusts will now be treated, and the status of any non-UK assets you have in trust will depend on your residence status.
This means that if you are a long-term UK resident when a chargeable event occurs, any non-UK assets in trust will become liable for IHT. Such events could include a distribution of capital from the trust, or charges at the 10-year anniversary.
Your UK pension assets will become liable for Inheritance Tax
Although not connected to the change from domicile to residency, you also need to bear in mind another change affecting your IHT planning on UK assets.
From 6 April 2027, any UK-based pension assets you hold will be liable for IHT.
This is clearly a major financial planning issue. At present, your retirement income strategy may entail preserving your accrued pensions to minimise your overall IHT liability. However, you may now want to consider a different approach whereby you use your pension to provide income ahead of other potential tax-efficient sources, such as ISAs.
In addition, the beneficiaries who inherit your pension may have to pay Income Tax at their marginal rate (up to 45%) on drawing down on such pensions.
Expert advice can help you deal with the effects of these changes
These changes could significantly affect your financial planning, subject to your personal circumstances and where you are living.
For example, if you are an Australian living in the UK, you could become liable for UK taxes on your worldwide income if you are a long-term resident.
Similarly, if you have accrued funds in a UK pension arrangement, your estate may become liable for IHT on the value of your fund when you retire.
These are significant changes, and so it’s important to review your financial planning arrangements to see if you are affected.
The areas you might want to consider reviewing include:
- Your long-term residency status
- Legacy planning
- Any existing trust arrangements.
We would strongly recommend that you get expert advice and guidance to help you assess how these changes could affect you and to ensure everything is structured in the best possible way.
Taking professional guidance can help you avoid unintended tax consequences and give you peace of mind that both you and your beneficiaries are well protected. Get in touch to find out how we can help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.