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Some non-doms will have to pay exit charges on trusts they hold if they leave Britain under measures set out in Rachel Reeves’ first Budget, even as the chancellor made concessions to stem the outflow of wealthy foreigners.
Charges of up to 6 per cent could apply to the trusts of departing non-doms who have lived in the UK for more than 10 out of the previous 20 years, according to technical documents published by the Treasury.
But Reeves decided not to levy inheritance tax at the headline rate of 40 per cent on any trust set up before October 30 on the death of its settlor. She also reduced the time non-doms who leave the country would remain exposed to UK inheritance tax, cutting the “tail” from 10 years to a minimum of three.
Many non-doms, wealthy foreigners who are resident in the UK but assert that their permanent home is overseas, left the UK or considered relocating after Reeves pledged to end a “loophole” exempting foreign assets held in trusts from UK inheritance tax indefinitely.
Ministers this week also outlined a “temporary repatriation facility” for foreign-owned income and gains held personally by non-doms or in trust, with flat taxes of 12 per cent and 15 per cent compared with a maximum of 45 per cent.
Rachel de Souza, partner at accountancy firm RSM, said the government’s softer stance on inheritance tax compared with before the Budget “should reduce the number of non-doms leaving” but that its measures were “not perfect”. “These trusts will now be subject to periodic 10-year and exit IHT charges. This is generally more palatable than a 40 per cent death charge but inevitably some families will still leave to avoid its effects,” she added.
Inheritance tax exit charges have not generally applied to the trusts set up by non-doms, which often contain tens or hundreds of millions of pounds. But they already exist in other parts of the trust regime.
From April, existing rules, known as the relevant property regime, will apply inheritance-tax exit charges to a non-dom’s foreign trust assets when they cease to be a long-term resident — that is, when they have left the UK and are about to escape the inheritance tax tail.
Under these rules, trusts will pay inheritance tax at a rate of up to 6 per cent every 10 years. The exit charge levied will be based on how much time has passed since the last 10-year trust charge.
The trust would pay a 3 per cent exit charge, for example, if five years had passed since the last 10-year charge.
Edward Hayes, director at law firm Burges Salmon, said most current non-doms who left the UK in the 2024-25 or 2025-26 tax years would pay an exit charge on their trusts but qualify for a three-year inheritance tax tail.
He said the response from clients to the Budget had been “varied”, with some relieved not to face an inheritance tax rate of 40 per cent on their foreign assets in trusts and others “upset” their trusts faced an exit charge.
“In a sentence, it’s not as favourable as some had hoped but not as bad as some had feared,” Hayes added.
Robert Brodrick, chair of law firm Payne Hicks Beach, said the trust exit charges would “be a real sting in the tail” and “take many people by surprise”.
Both Labour and the Conservatives pledged to phase out the non-dom regime at the July general election. But unlike the Tories, Labour promised to tighten the rules further by removing the ability of non-doms to use trusts to shelter their overseas assets from UK inheritance tax.
Only 1,200 of the 74,000 people who now claim non-dom status were likely to leave the UK because of the changes to the regime, according to government analysis. It found that the reforms would raise £12.7bn over the next five years.
But the Office for Budget Responsibility, the fiscal watchdog, this week described that forecast as “highly uncertain”, noting that it was dependent on “a relatively small number of wealthy individuals”.
The Treasury said in a statement: “Ten-year anniversary and exit charges already apply to trusts made by people who are domiciled in the UK. The new regime creates fairness by applying these charges to non-doms who are long-term UK residents.”
Dominic Lawrance, partner at Charles Russell Speechlys, said that while the concessions “were welcome as far as they go, they are a bit of a lipstick on a pig”. The real question was how effective the new system would prove at stopping current non-doms from leaving and drawing new arrivals, he added.
Additional reporting by Harriet Agnew in London