FOTRA Securities: A Rare Inheritance Tax Planning Opportunity for Non-UK Resident Long-Term Residents

For non-UK resident individuals who nevertheless remain long-term UK residents for inheritance tax (IHT) purposes, planning opportunities can be surprisingly limited. Although an individual may have left the UK and become non-resident, their worldwide assets can still remain within the scope of UK IHT under the long-term residence regime (with an IHT tail lasting up to 10 years depending on how many years they have previously been resident in the UK).

This often comes as an unwelcome surprise. In contrast to income tax and capital gains tax, where non-residence can significantly reduce UK exposure, IHT can continue to apply to worldwide assets long after departure from the UK.

As a result, conventional IHT planning options are relatively narrow. While reliefs such as Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”) may still be available in some circumstances, they generally require a two-year holding period and can be subject to clawback if the qualifying conditions cease to be met. In addition, the previous 100% relief regime has been significantly restricted, with full relief now capped at £2.5 million and any excess qualifying only for 50% relief.

One niche but potentially valuable opportunity is the treatment of FOTRA (‘free of tax to residents abroad’) securities, which include most UK government securities. HMRC confirms in their manuals that “government securities acquired on or after 6 April 2013 will be exempt (from IHT) provided the beneficial owner is resident outside the UK”.

Unlike BPR or APR assets, there is no minimum holding period before the exemption applies and no clawback mechanism. In practice, this means the IHT protection can apply immediately. Another important distinction is that lifetime gifts of qualifying FOTRA securities do not constitute potentially exempt transfers (“PETs”). The planning therefore does not depend upon surviving seven years after making a gift. There can also be wider tax advantages. In certain circumstances FOTRA securities may benefit from favourable income tax treatment, while disposals of gilts are generally exempt from capital gains tax.

However, residency planning remains critical. The exemption depends upon the beneficial owner being non-UK resident, so careful consideration must be given to UK statutory residence rules, split year treatment, treaty residence issues and future plans to return to the UK. In many cases, the effectiveness of the planning will depend as much upon maintaining non-UK residence as upon the investment itself. In an environment where IHT planning for long-term residents has become increasingly constrained, FOTRA securities represent one of the relatively few straightforward and immediate planning opportunities still available.

‍How can Sanctuary help?

For non-UK residents who remain long-term UK residents for inheritance tax purposes, FOTRA securities may offer a rare and immediate planning opportunity. However, the effectiveness of this planning depends heavily on residence status, the type of securities held, future UK return plans, and the wider interaction with UK inheritance tax, income tax and capital gains tax.
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At Sanctuary, we help clients assess whether FOTRA securities may be appropriate as part of their broader estate and succession planning. We can also advise on UK statutory residence, split-year treatment, treaty residence and wider cross-border structuring considerations.

Visit our Tax & Advisory service page to find more about our tax & residency advisory services, or contact us for a bespoke consultation via the contact form or email us at: hello@sanctuary.ae.