Where once foreign assets were safely out of the range of Inheritance Tax (IHT), the recent changes have meant that they will now be considered for long-term UK residents.
The change to domicile rules for IHT centres around the definition of a long-term resident of the UK being someone who spent ten of the previous 20 years residing in the country.
This has paved the way for a novel way to engage with tax as, if a person does not spend more than nine years in the UK during any 20-year period, it is possible for them to circumvent the changes to IHT.
This is becoming known as the ten years out, nine years in method and could be the future of IHT reduction.
Whether you are a UK resident for tax purposes is determined by the Statutory Residence Test.
Would taking a ten-year holiday work to lower Inheritance Tax?
The idea of taking a decade-long holiday will not do anything to protect your UK-based assets, but it is a vital consideration for those with a sizeable number of foreign assets.
Any bank accounts, businesses, or residences that you have in other countries will be excluded from your IHT calculations if you are not deemed to be a long-term resident of the UK.
If you are able to protect your overseas assets from IHT, you can strategically move your high-value assets to other countries to ensure that they do not end up as part of your IHT calculations.
As such, a second home in a foreign country could be the boon your estate needs, providing a tax-efficient wrapper for your investments while also giving you somewhere to go to escape the terrible British weather.
You can choose any country you like for your decade-long holiday, as the impact on your IHT will be the same.
The UAE remains a popular choice for those who dislike taxation due to its lax tax laws and hot weather.
Are there any downsides to the ten years out, nine years in approach?
Timing is the key consideration for making this approach work.
During your ten-year holiday, you will not be able to return to the UK at all.
If you do end up back in the country, the clock will reset, and any time you have spent away will not have counted towards your IHT mitigation.
Even once you have finished your tenure overseas, you will need to closely monitor how much time you spend in the UK.
You will not be able to stay for longer than nine years before you have to go on another holiday, but what you do in that time is up to you.
Living between the UK and your country of choice could keep your UK time down and reduce the risk of exceeding the time threshold and becoming liable for IHT.
You should consider whether there are likely to be any factors that cause you to overstay your time in the UK.
This could include family commitments or health issues for either yourself or a relative, as there may be some events that you will not want to miss and will need to stay in the country for.
Your residence tally will increase for as long as you are in the UK, so make sure you use your time here sparingly.
Even split years (i.e. partial tax years) when you are considered a tax resident under the Statutory Residence Test would count as a full year of UK residence for IHT purposes.
It is also worth keeping in mind that the more popular this strategy gets, the more likely it is to be blocked.
Future changes to IHT are likely to see a reduction in the thresholds if the method proves to be too effective, but for now, it remains fertile ground for opportunity.
It is also worth considering what you will do with your UK home during your exile.
You are free to rent it out or allow family friends free use of it.
It is still yours, but you cannot return to it until your holiday is over.
Owning a home in the UK can impact the number of days you are allowed to be in the UK before you are classified as a UK resident for the tax year.
If you have property overseas, it might be worth giving this method a go and seeing if you can cut down on your IHT.
If nothing else, you will end with a good tan and a relaxed retirement.
If you are thinking of creative ways to reduce your Inheritance Tax bill, speak to our team for expert advice.
