The loophole that would imply Britons retiring overseas will NOT pay inheritance tax: How adjustments in Budget may even see these heading abroad escaping dying duties of 40%

Wealthy Britons retiring overseas could now escape inheritance tax altogether thanks to a loophole in non-dom rules unveiled by Labour in the Budget. 

Present rules state that anyone with a British ‘domicile’ has to pay inheritance tax (IHR) on their worldwide wealth even if they spend their retirement, and die, in a foreign country. 

But the new system replaces domicile with residency, meaning that those who retire abroad will not pay IHT on their foreign assets as long as they have been living outside the UK for at least 10 years. 

This could see them avoid charges of 40 per cent – a massive boon to expats at a time when other groups, such as UK-based farmers, are about to lose out. 

Sir Richard Branson has lived on Necker Island in the British Virgin Islands for nearly 20 years

‘If someone was thinking of retiring overseas, this may give them the push they needed,’ Chris Etherington, partner at accountancy group RSM, told the FT. 

The changes to the non-dom regime will come into force in April and mean tens of thousands of Brits already based abroad will immediately be relieved of the threat of paying IHT when they die. 

They include the likes of Virgin founder Richard Branson, who has lived on Necker Island in the British Virgin Islands for nearly 20 years. 

‘A lot of people who are expats don’t really appreciate what’s happened and may not be paying much attention to the non-dom rules, so wouldn’t realise they are the unexpected beneficiaries,’ Mr Etherington said.

Non-dom, short for non-domiciled, relates to someone who lives in Britain but whose permanent tax residence is registered abroad. Those with the status do not have to pay UK taxes on their foreign earnings and assets. 

At present, an individual’s domicile is where they consider their permanent home to be.  

It is possible to change a UK-domiciled status by acquiring a ‘domicile of choice’ in another country, but this is a complicated process. 

Experts have warned that Rachel Reeves’ decision to abolish non-dom status in her Budget will spark an exodus of wealth creators.

Maxwell Marlow, of the Adam Smith Institute, said: ‘The abolition of the non-dom regime will drive away highly mobile wealth creators and so their tax contribution will decrease and they will invest less in our economy.’

The new system replaces domicile with residency, meaning the majority of people who have lived abroad for more than 10 years will not pay IHT on their foreign assets

Nigel Green, chief executive of financial advisory firm deVere Group, warned the exodus will leave ‘lasting scars on Britain’s economy’. He added: ‘The UK has long benefited from the economic contributions of non-doms, whose direct and indirect investments and business activities have been integral to the nation’s prosperity.

‘The allure of the non-dom tax status has been a pivotal factor in attracting international talent and creating a dynamic business environment. Its removal is likely to signal a shift in the global perception of the UK as a favourable destination for wealth creation and business development.’

Former Conservative chancellor Jeremy Hunt introduced plans to scrap the regime in his Budget earlier this year. But Ms Reeves has gone further to close a so-called loophole that allowed those with the tax status to protect their assets in an offshore trust.

She has unveiled a replacement scheme to encourage wealthy foreigners and overseas investors to come to Britain temporarily.

But official estimates forecast that more non-doms will leave the country under Ms Reeves’ plan than the one announced by Mr Hunt in March.

Rachel Reeves pictured earlier this month during a visit to Tokamak Energy in Milton, Abingdon

The Office for Budget Responsibility said her decision will ‘slightly increase migration’ relative to the changes announced by Hunt earlier this year. It estimated that 12 per cent of non-doms who are ineligible for the new regime will leave the country – up from 10 per cent following Mr Hunt’s plan.

Marcelo Goulart, of the First Alliance group, said the reform was a ‘colossal misjudgement’. He added: ‘[It has] exacerbated the damage that has already been done to the UK’s reputation as a prime jurisdiction for wealthy international people.’

An HM Treasury spokesperson said: ‘Replacing the outdated non-dom tax regime with a new internationally competitive new residence-based system addresses unfairness in our tax system, attracts the best talent and investment to the UK, and ensures everyone who is a long-term resident in the UK pays their taxes here.

‘This was a once-in-a-Parliament Budget to wipe the slate clean, and our package of changes to this regime in the Autumn Budget is forecast to raise £12.7 billion over the next five years to help fill the £22 billion fiscal hole and rebuild our public services.’