Are you sure you want to leave the UK to avoid inheritance tax?
Advisers say increasing numbers of clients are taking advantage of residency rules
Are you thinking about leaving the UK to avoid inheritance tax? Wealth advisers to the country’s richest people say that it’s all anyone wanted to talk about this year — and, for a surprising number, the answer was “yes”.
I say surprising, because it makes you wonder if these people have actually considered what it would entail. These are people who want their heirs to inherit as much money as possible — but to do that they are willing to see less of them while they’re still alive. So the question really becomes, which do you hate more: paying taxes or spending time with the grandkids?
These people aren’t non-doms, advisers say — who often live a peripatetic lifestyle anyway. They are UK citizens taking advantage of the change in the non-dom regime in April, acting on what is perhaps an unintended consequence of the new rules. By ditching domicile as a measure of where you should pay inheritance tax and replacing it with residency, all a UK resident needs to do now to avoid IHT is live in another country for 10 years. After this time, their overseas assets fall out of UK inheritance tax (though not their UK assets — those opting to keep the £5mn Mayfair pad will still have to pay IHT on that).
This sounds bonkers. But Nimesh Shah, head of tax adviser Blick Rothenberg, says about 10 per cent of his firm’s clients have already left, while another 10-15 per cent are thinking of doing so. Of course, only those with significant wealth — upwards of £15m, one adviser reckons — are considering leaving.
Not only can you escape inheritance tax by becoming non-resident: if you then move back to the UK, your overseas assets don’t fall back within the IHT system for another 10 years. This means that people could attempt to time their death by, essentially, planning to die within a decade of returning to the UK.
The mind boggles at the practicalities of such a decision. Say you left in your mid-60s and returned in your mid-70s. Your life expectancy at 75, according to the ONS website, is another 12 years for a man and 14 for a woman. You have to get to 80 before your life expectancy is less than a decade for a man — and 82 for a woman. And that’s not even taking into account the fact that rich people live longer than average, making it even riskier to time death.
Some try to mitigate the downsides by selecting a closer option. Jersey and Guernsey are particularly popular, advisers say, bringing the advantage of being able to swoop in for a day trip to see the grandchildren in a play without using up a precious overnight stay in the UK for tax purposes. Yet it impacts families in other ways. Often — “more often than you’d think”, says one adviser — the husband will leave the country, while the wife and kids stay.
Not everyone is game. One adviser tells me of a client who was excited about the idea of leaving the country to save on tax. A few weeks later he returned, sheepish, and said that it was no longer on the table: they had just had a grandchild and his wife had said she wasn’t coming.
And some people are already coming back to the UK because things didn’t work out. Reasons given: Portugal was boring; they couldn’t get their kids into school in Geneva; the locals in Milan didn’t like them; and they paid £10mn for an apartment in Monaco with a sea view, then someone built an apartment in front of them.
Alan Barral, a financial adviser at Quilter Cheviot, says that most wealthy clients ultimately decide that the inconvenience to their life outweighs the positives.
For now, the number of UK citizens leaving for tax purposes isn’t an exodus due to these personal considerations. But for the younger generation it could be a different story.
One adviser says that for many entrepreneurs in their 30s and 40s, “the spectre of their worldwide assets being subject to UK IHT is too much for them to bear”. The UK’s high flat rate of 40 per cent IHT is seen as particularly off-putting for those with global options. While it may seem a premature topic for people so young to worry about, the question of leaving the country to avoid IHT after they sell their business is now firmly part of the discussion, advisers say.
If they leave and don’t come back, their children may not end up in the UK anyway, removing what is a current barrier to exit for many.
And those balking at the idea now might come round to it in a few years if it becomes normalised in their circles. Such people are likely to feel strongly about the notion of fair taxes: while inheritance tax is notoriously unpopular among those liable for it, squeezes via other taxes on wealthier people are making some decide that if there is an exit route they will take it.
One adviser says their clients would have been willing to pay up to half a million or even more to maintain non-dom status, as opposed to the relatively small £90,000 under the old regime. Compromises like these — pitting political points against revenue-raising measures — should be considered if the government wants to keep more mobile multimillionaires in the country. For now, they just have to hope that their grandchildren are sufficiently entertaining.