Moving abroad won’t save you from the British tax man
Brits have become ensnared in tax traps following an upheaval of the system by Chancellor Rachel Reeves in the past two Autumn Budgets.
UK households have been slammed by a number of shake-ups, including an extended freeze of the income tax thresholds, a hike to dividend tax and a new ‘mansion tax’ on properties valued at £2m or more.
But no tax has caused more of an uproar than the widely-abhorred inheritance tax (IHT). Businesses are no longer exempt from IHT, with 100 per cent relief now capped at £2.5m per property.
But families are bracing for further changes in April 2027, where unused pension funds and lump-sum death benefits will be brought into the net.
This impending change has led to a wave of Brits fleeing the UK, but swapping rain for sunnier skies does not always save you from the clutches of the taxman.
Roughly 4.8m Brits overseas could still be exposed to inheritance tax, according to financial advisory firm deVere Group.
Nigel Green, chief executive of Devere, said: “A huge number of Britons abroad still believe leaving the UK automatically protects them from inheritance tax.
“For many people, this assumption is becoming dangerously outdated.”
Lacking awareness
Devere pinned this lack of awareness of the tax trap to the abolition of the ‘non-dom’ regime in April 2025.
Under certain conditions, it enabled UK residents with a permanent home outside the country to effectively exempt their foreign income from UK tax.
It also offered protection from inheritance tax, with Reeves declaring her intentions to change the system in her provisional Autumn Budget.
This was replaced by a new residence-based foreign income and gains regime, which shifted the tax focus from an individual’s non-dom status to the number of years they live in the UK.
An individual falls completely into the scope of IHT on worldwide assets if they have been a UK tax resident for 10 of the last 20 years, a five-year drop from the prior regime, swiftly accelerating exposure for expats moving to the UK.
But those fleeing abroad can also be exposed, depending on their previous UK residency, with former residents potentially remaining within the net for up to 10 tax years after their departure.
Non-UK assets remain in the scope of IHT for a ‘tail period’, meaning they are left within the remit depending on how long an individual lived in the country, with those of 10 to 13 years of residence having a three-year tail.
But for those with over 13 years of prior residence, the tail extends by one year for each additional year before reaching a maximum of 10.
Despite the change, Green noted that many expats still believe that their “tax exposure ends the moment they move overseas”.
Other unexpected tax bills can also pile on those jetting off, with even a short-term move carrying the risk of continued UK tax residence, particularly in the year of departure.
This is because the statutory residence test, which determines your tax residence status, applies for the whole tax year rather than just the date of departure.
The test considers the number of days spent in the UK alongside other factors, including work ties, living arrangements and family connections.
Sore spot for retirees
The changes to IHT are particularly bruising for pensioners enjoying a retirement in the sun, with pension wealth set to be swallowed up by IHT regardless of whether they move abroad and of their new country’s tax regime.
Under the 2027 rules, unused pension pots and certain pension death benefits could face 40 per cent IHT, with some beneficiaries also facing potential income-tax liabilities depending on how the assets are inherited.
For example, British expats living in Spain who satisfy the UK’s 10 out of 20 rule will be subject to 40 per cent IHT on worldwide estates, while the Spanish government will also claim tax on their estates as a Spanish resident.
Meanwhile, France has forced-heirship rules that expats are subject to, meaning they are legally bound to reserve a strict portion of their estate for their children, overriding UK wills.
Expats will also have to contend with differing treatment of pension wealth, heightening the risk of overlapping tax exposure.
Green said, “International families are entering a much tougher planning environment.
“Britain is tightening the inheritance tax net around internationally mobile individuals, and the window for action is closing fast.”
“Millions of people overseas may not yet realise how exposed they could still be.”
State pension blues
Retirees could also forgo a staggering £77,000 in state pension income over the next 20 years if they opt to relocate to a country where payments are frozen.
According to wealth manager Rathbones, those seeking sun lose access to the UK’s triple lock, which ensures the state pensions rise each year by inflation, average earnings growth or a minimum of 2.5 per cent.
But in certain countries, including popular choices such as Canada, Australia, and New Zealand, state pension payments are frozen at the first rate received, with no future increases.
Pensioners who opt to live overseas for 20 years could lose up to £77,585 in state pension income, while those who go for ten years could be more than £18,600 worse off.
Roughly 450,000 pensioners living overseas are already affected by the UK’s frozen pension policy, with the replacement of the income requiring a significant private financial buffer.