FOTRA – Inheritance Tax Planning Opportunities

What is FOTRA?

FOTRA stands for “free of tax for residents abroad” and refers to the tax exemption available for UK Treasury Gilts owned by non-UK residents. The regime applies to various UK taxes, but this article focuses on Inheritance Tax (IHT).
 
Gilts (sometimes called gilt-edged securities, or UK government bonds) are ordinary vanilla low-risk investments backed by the UK Government. Importantly, UK Gilts are much lower risk than most other types of investment traditionally used for their IHT exemptions[1].
 
The FOTRA regime has existed for many years but broad tax changes on 6 April 2025 have revealed some hitherto unappreciated tax-saving opportunities with this regime, especially for IHT.

Doesn’t moving abroad automatically stop IHT on my estate anyway?

No, under current rules UK assets in a person’s estate are always within the scope of IHT, so a 40% tax charge will arise on death. 
 
Whether or not foreign assets are also subject to the 40% IHT charge depends on whether the owner is a ‘long-term resident’. Broadly that means whether they were UK tax-resident in at least 10 of the 20 UK tax years prior to the tax year in question[2] (usually, the tax year in which they died). 
 
That means that for most UK residents, completely avoiding IHT requires them not only to leave the UK but to also invest their entire estate in non-UK assets and remain non-resident for ten complete tax years.

What’s different about FOTRA Treasury Gilts?

Treasury gilts within the FOTRA regime are automatically exempt from IHT so long as the beneficial owner[3] is not UK resident for tax purposes.
 
It would be preferable to choose UK Gilts issued since April 2013, as gilts issued before that time were generally subject to an older residency test known as ‘ordinary residence’ which is likely to add uncertainty.

Example

John is a 75-year-old widower, British and has lived in the UK all his life. The value of his estate over and above his IHT allowances is £3,000,000, mostly invested in rental property and an investment portfolio. John’s expected IHT exposure on his death is therefore £1,200,000.

John decides to mitigate his IHT liability by moving to Jersey, in the hope of living a further 10 years at which point he would cease to be long-term resident and any non-UK assets will be exempt from IHT. 

However, shortly after moving John receives a terminal diagnosis and is unlikely to live more than a year. Most IHT planning options (e.g. lifetime gifts[4]) are therefore unlikely to assist in reducing his IHT exposure since he will still be a long-term resident when he dies. 

John sells his property and investment portfolio[5] and invests his entire estate in UK Treasury Gilts. Six months later John dies – he is not UK tax resident in the year of death. His estate is completely free of IHT.

Are there any risks with this planning?

1. Might the UK Government change these rules?

It is unclear whether this IHT result is an intentional UK government policy. Until 6 April 2025, there was some doubt as to whether the FOTRA-owner must also be non-UK domiciled as well as being non-UK resident in order to be exempt from IHT. If so, John would certainly not be eligible for FOTRA reliefs.
 
However, domicile was entirely removed from the IHT regime on 6 April 2025. Going forward it is clear that domicile is irrelevant and FOTRA is dependent entirely upon whether a person is UK resident. HMRC expressly states this in its published Inheritance Tax Manual[6].
 
The FOTRA regime treatment is part of the issuance conditions of long-term investments, so any retroactive change by the Government to impose tax on gilts would arguably have reputational and contractual consequences for the UK Government.
 
However, the FOTRA regime is a clear anomaly, and a departure from the Government’s stated policy of IHT being based on long-term residency[7]. In our view, there remains a considerably likelihood that FOTRA IHT rules will be changed in future and this matter should be kept under review.

2. Being sure of your residence position

The UK ‘statutory residence test’ determines whether a person is resident in the UK for tax purposes in a given tax year. The test generally works by specifying how many days a person may spend in the UK before they are treated as UK resident. The actual number varies according to how many “ties” a person has with the UK, and there are also automatic tests which may override the normal day-count rules and cause a person to be UK resident regardless.
 
The test is complex and often yields surprising results. For example, where a person dies mid-way through a tax year, the number of UK days required to be UK resident in the part of the tax year prior to death is reduced. Full advice should be taken.

3. Could HMRC attack this form of planning as abusive or artificial?

HMRC has broad powers under the UK’s General Anti‑Abuse Rule (GAAR) to counter arrangements it views as abusive, meaning that even where legislation technically allows a result, HMRC may seek to overturn planning that it considers does not accord with Parliament’s intended purpose
 
In our view, a case such as John’s above is unlikely to be capable of being attacked by HMRC. 
 
However, some forms of FOTRA planning may indeed be attacked in this way. In our example above, if John had not died in 2026/27 but had instead made a gift of his entire £3,000,000 estate (invested in Gilts) to his children during this tax year, before returning to the UK the following tax year, in principle the gift would not be chargeable to IHT even if John dies within the following seven years. However, in our view, this type of temporary absence from the UK to achieve FOTRA treatment is more likely to be considered artificial and subject to being undone by HMRC.

A note on UK foreign-currency bank accounts

Foreign currency bank accounts (e.g. a USD account held in the UK) are often discussed by tax advisors alongside FOTRA Gilts. This is because, unlike most UK bank accounts, foreign currency bank accounts are also exempt from IHT on death if the owner is non-resident. 
 
However, unlike FOTRA Gilts, the holder of a foreign currency bank account must be both non-resident and also not a UK long-term resident to qualify for this relief[8]. Also, the exemption for foreign currency accounts only applies to IHT arising on death, not lifetime gifts and trusts. This removes most of the planning opportunities discussed above which are available for FOTRA Gilts. 

How can Birketts help?

The Birketts International Private Client team can assist clients with their residency and cross-border tax planning. Please get in touch if you would like to discuss this further.
 

[1] For example, investments listed on the Alternative Investment Market (AIM)
[2] Although if a person has been UK resident less than 20 years before leaving the UK, the requirement to be non-resident for 10 complete tax years is reduced by the “tail” rules.
[3] That is, the person who ultimately owns the asset, not merely an offshore nominee. Different rules apply to FOTRA assets held in trust.
[4] It is generally necessary to survive seven years from the date of a gift to avoid IHT on the gifted asset
[5] Capital Gains Tax should be considered
[6] IHTM04291
[7] The Government’s 2025 Technical Note Reforming the taxation of non-UK domiciled individuals hints that the government expected that the introduction of long-term residency rules for IHT would better align the standard IHT regime with the FOTRA regime, rather than create an even greater anomaly.
[8] Section 157 Inheritance Tax Act 1984