UK Inheritance Tax (IHT) and long-term residence: what’s changed?

The UK is changing how inheritance tax (IHT) works for people who live here for a long time, and the rules now focus more on residence than domicile. This can bring overseas assets into the UK IHT net sooner, while people who leave the UK may also stay within scope for a period after they go. Early planning can help families understand the risk and prepare for a possible tax bill.^{1 2}

What’s changing?

The UK is moving towards a residence-based IHT system, which is important if you have assets in more than one country. Your UK residence history can affect whether UK IHT applies to your worldwide estate.^{1 2}

The rules are detailed, and the answer will depend on your own facts. This includes where you’ve lived, where your assets are, and whether a tax treaty applies.^{1 5}

The new framework: residence over domicile

In the past, IHT often depended on whether you were UK-domiciled, but under the new framework, your history of residence matters more.^{1 2}

If you live in the UK for a long time, UK IHT may apply to more than your UK assets, and for some long-term residents it can apply to assets held around the world.¹

IHT exposure before 10 years of residence

If you’ve been UK resident for fewer than 10 tax years, your position is usually more limited. UK assets may still be within scope, subject to allowances and exemptions.^{1 2} These can include:

• UK property
• Shares in UK companies
• Some UK-based investments

Non-UK assets may stay outside the UK IHT net at this stage. But they may still be taxed in another country.^{1  5}

This can give new UK arrivals time to plan, but it’s still important to act early. Plans should also be checked as your life and the rules change.^{1 2}

IHT exposure after more than 10 years of residence

After more than 10 years of UK residence, the position can change, and you may be treated as a long-term UK resident for IHT. This can bring your worldwide estate into scope.¹

This means overseas property, investments and bank accounts may all be counted. The standard IHT rate is 40% on the value above available thresholds, after any reliefs or exemptions.³

The nil-rate band is currently £325,000, but the final position depends on your circumstances and any reliefs that apply.³

The UK has a limited set of inheritance tax treaties, and local tax rules can also affect the final bill. Families with wealth in more than one country should review the full picture.⁵

The “tail” when leaving the UK

Leaving the UK may not end UK IHT exposure straight away, as long-term residents can remain within scope for a “tail” period after they leave. The length of this period will depend on their UK residence history.¹

During which time, worldwide assets may still be exposed to UK IHT. This makes exit planning important, especially for families with property, investments or business assets in several countries.^{1 5}

Using life insurance in trust to help manage IHT

There are many ways to plan for a possible IHT bill, and for some families one option is life insurance written in trust.²

The policy is usually designed to help cover a possible tax bill, and the term should reflect how long the risk may last. If the policy is written in trust, the proceeds may sit outside the estate, although this depends on the trust being set up and managed correctly.²

Its key benefits:

• The proceeds may fall outside the estate. If set up properly, the payout should not increase the IHT bill.²
• It can provide cash when it is needed. IHT is generally due within six months after the end of the month of death.⁴
• It can help you to avoid rushed sales. Cash from a policy may reduce the need to sell property or investments quickly.⁴
• It can offer some control. Trustees can follow the trust deed when deciding how to use the money.²

Some practical planning points

• Understand your exposure. Check your residence history, asset location and possible IHT risk.^{1 2}
• Plan for the unexpected. Think about what would happen if death occurred while UK IHT still applied.¹
• Take specialist advice. Cross-border IHT planning is complex. The right answer depends on your facts, tax treaties and asset structures.⁵
• Review plans often. Residence status, family needs and tax rules can all change.⁶

Conclusion

The move towards residence-based IHT means long-term UK residents may face wider tax exposure on their global wealth.1 The first 10 years can offer a planning window, but going past that point can have important effects.¹

Life insurance written in trust is not right for everyone. But for some families, it can help provide money to meet a future tax bill and protect wealth for the next generation.²

Important information

This article is for general information only. It’s not personal advice, tax advice or a recommendation to buy, sell or hold any product. Tax treatment depends on individual circumstances and may change. If you are unsure what these rules mean for you, please speak to a qualified tax adviser or financial planner before acting.

Sources

¹ HM Treasury and HMRC, Reforming the taxation of non-UK domiciled individuals
² HMRC, Inheritance Tax Manual
³ GOV.UK, Inheritance Tax
⁴ GOV.UK, Pay your Inheritance Tax bill
⁵ HMRC, Find a Double Taxation Treaty
⁶ GOV.UK, Work out your residence status