According to Marc Acheson, Global Wealth Specialist at Utmost, a leading provider of insurance-based wealth solutions, the UK is experiencing a second wave of wealthy individuals leaving the country as concerns over inheritance tax exposure continue to grow.
The first wave of departures comprised non-domiciled individuals who left following the abolition of the non-dom regime and the inclusion of previously excluded property trusts within the scope of IHT announced at the Autumn 2024 Budget. For many internationally wealthy individuals, the extension of inheritance tax to global estates, exposing them to a 40% tax charge, proved to be a highly emotive issue and deal breaker, particularly as their wealth had typically been generated or inherited outside the UK. It made the UK an outlier internationally, as many competing jurisdictions apply significantly lower charges or nothing on death.
An irony of the transition from a domicile-based regime to a residency-based system has been that it has accelerated decision-making among internationally mobile wealthy individuals. By replacing the historical ambiguity of domicile with a fixed statutory clock, individuals now have the certainty that they must maintain non-UK tax residency for 10 years to avoid the 40% inheritance tax net, prompting them to start making relocation plans much earlier than under the previous system.
The UK is now experiencing a second wave of wealthy individuals leaving the country, encompassing long-term residents, entrepreneurs and business owners. This is being driven primarily by the application of inheritance tax to family businesses, marking a major policy shift. Previously, assets could be passed down between generations free from inheritance tax under full Business Property Relief, but those reliefs are now capped. Despite a revised £2.5 million exemption threshold, business values above this level face a 20% effective IHT rate. Many business owners aren’t willing to expose their businesses to this and are looking to exit before they crystallise any gains or trigger future inheritance tax liabilities.
Furthermore, the inclusion of most unused pension pots and lump-sum death benefits within inheritance tax calculations from 6 April 2027 is reshaping long-term succession planning. Historically treated as separate, tax-exempt vehicles, these accrued funds will now face the standard 40% inheritance tax rate if the total estate exceeds available thresholds.
As a result of these changes, IHT is increasingly affecting more households. Around one in 20 estates currently pay inheritance tax and the Office for Budget Responsibility expects that figure to rise to roughly one in 11 by 2030-31 – almost double the proportion affected today.
Commenting, Marc Acheson, Global Wealth Specialist at Utmost, said:
“When we speak with clients, the principal reason they point to for reviewing their UK residency is the expanding scope of IHT. This is a tax that raises relatively little revenue compared to the challenges and disproportionate behavioural consequences it creates.
“Just recently it was reported that HMRC is consulting on the extension to the Uncertain Tax Treatment regime – introduced in 2022 for large businesses – to private individuals as part of efforts to reduce the tax gap. This is on top of further recent reports suggesting that the “Mansion Tax” may not generate the revenues projected.
“The cumulative impact of all this is that the UK is driving wealth creators away – both foreign and now domestic. This matters because the economy cannot afford to lose these individuals, who are the largest contributors to the tax base, and once this cohort leaves it is very hard to replace them.
“The challenge the government has is that the battleground for attracting wealth is highly competitive. While the UK has become less competitive as a destination for wealth, countries such as Italy and Switzerland have been working tirelessly in the background to lure this wealth away by offering attractive regimes as they seek to broaden their tax bases, and have become very successful in doing so.”
