This year’s changes to inheritance tax for both UK and other citizens

From 6 April 2025, the rules used to determine liability to Inheritance Tax in the UK (IHT) changed. UK IHT was previously payable on worldwide assets only by individuals who were resident and domiciled (or deemed domiciled) in the UK. Our guide: An Introduction to Inheritance Tax covers the key thresholds and exceptions as well as estate planning tips for UK resident and domiciled individuals.

Historically, individuals who were resident, but not domiciled, were subject to IHT only on their UK assets (and not their non-UK assets). The rules to determine domicile are complex and whilst now less relevant still need to be taken into consideration (please refer to our guide: An Introduction to Domiciles for further discussion of the topic). Under the previous rules, a non- UK domiciled taxpayer needed to be a UK tax resident for 15 of the previous 20 tax years to become “deemed domiciled” and therefore liable to IHT on their worldwide assets.

The rule of domicile no longer dominates or determines which assets become subject to IHT. This change therefore impacts how both UK domiciles and non-domiciles might have exposure to UK IHT in future.

The New Rules

Since 6 April 2025, liability to IHT has been based on residence not domicile. As before, assets based in the UK will always be subject to UK IHT but whether non-UK assets become subject to IHT depends on the individual’s ‘long-term residency’. This residency rule looks at whether an individual has been tax resident in the UK for at least 10 of the last 20 years. Residence is established using the Statutory Residence Test (see our Introduction to the Statutory Residence Test guide) and so it is days in the UK and ties to the UK that determine an individual’s tax position, not heritage.

Notable impacts are that the 10 years needed to become subject to worldwide IHT is shorter that the previous 15 years before becoming “deemed domiciled”.  Therefore individuals now become subject to worldwide IHT quicker than they might have done under the old rules.

However, with the removal of the domicile link, its is now potentially easier for a UK domicile to lose their worldwide UK IHT exposure, through long-term non-residence.

The IHT “tail”

Individuals that have been long-term residents will have a tail of ongoing exposure to UK IHT for a longer period of up to 10 years. A long-term resident (someone who has been in the UK 10 years) who leaves the UK and ends their UK residency, will remain subject to UK IHT on their worldwide assets until they have been non-UK resident for between three and 10 years, depending upon the length of their previous UK residency.

This tail works on a sliding scale so that those resident for 10-13 years will have to wait for 3 years of non-residency, rising one year for every additional year of residency, to a maximum of 10 years for those resident for 20 years or more. This has the effect of creating clarity where previously there was some debate as to an individual’s domicile (especially when non-resident) and hence liability to IHT.

After 10 consecutive years of non-residence, assets subject to UK IHT are limited to those within the UK, such as UK property for example. This rule is the same whether the individual is a UK citizen and domiciled or not.

Property previously excluded from IHT, for example non-UK situs assets owned by individuals resident but not yet domiciled (in some cases even those now domiciled) in the UK will, from 6 April 2025, only continue to be excluded if the holder is not a long-term UK resident. This has implications for Excluded Property Trusts and similar arrangements entered into before April 2025 by non-domiciled individuals that may not have become UK domiciled but have remained UK resident and exceeded 10 years of residence. Those who have set up or who are considering setting up a trust should have these arrangements reviewed.

Other Impacts

Finally, a UK domiciled spouse or civil partner could previously inherit from another UK domiciled spouse/partner without incurring IHT. However, If one spouse or partner was non-UK domiciled, amounts exceeding £325,000 were subject to IHT unless the relevant spouse/civil partner elected to be treated as being deemed domiciled. Once an election was made, the individual was deemed domiciled until they lost “deemed domicile” status by remaining non-UK resident for four consecutive tax years. The same position applies now except that the concept of long-term residency has been swapped for domicile, meaning that both spouses/partners must have been (or elected to be treated as having been) UK resident for 10 years to avoid the limitation. Long-term residency can then be lost only by leaving the UK and remaining non-UK resident for the requisite period (as above, 3-10 years).

The impact on trusts extends beyond Excluded Property Trusts and other trusts. For example, a trust settled by a UK resident, who then subsequently loses their long-term residence status, could suffer charges. Again, we recommend that advice is taken in this complex area.

We’re here to help

Whilst the new rules appear more restrictive, they also provide opportunities for those coming to or planning to leave the UK. The changes will no doubt be far reaching but also bring certainty where previously ambiguity prevailed – for example, losing long-term UK residence is more easily discernible than ending UK domicile.

For UK domiciles returning to the UK after a long time overseas, they too can now benefit from delaying  overseas assets becoming subject to UK tax – this opens the door to planning opportunities for these individuals.

UK IHT is a complex and confusing field and has been described as a ‘voluntary tax’ paid by those who omit to plan ahead. These, and the broader changes to taxation for individuals moving to the UK, present a chance to review your current circumstances together with your advisers and put in place measures to reduce the overall financial impact for you and your loved ones.

Whether you are already a long-term resident or not, or planning to come to the UK in the future, specialist financial planning has its clear advantages. The changes to the rules bring new complexities which mean that taking specialist advice early or reviewing previous advice is essential.

At Partners Wealth Management, our advisers have the experience and qualifications to support you throughout the process, partnering with suitable tax and legal professionals in a collaborative team to work through and solve complex issues on your behalf. Please call us on 020 7444 4030 or email us for an initial conversation.