13th March 2025
From April 2025, the UK’s Inheritance Tax (IHT) rules will undergo a significant change, shifting the basis of taxation from domicile to residence. This reform is intended to modernise the system, bringing it in line with how people actually live and maintain connections with the UK.
At present, IHT is determined by an individual’s domicile status. Domicile is a complex legal concept, but in most cases refers to the country of birth. A UK-domiciled individual can be subject to UK IHT on their worldwide estate, even if they have been non-resident in the UK for many years.
Whereas a non-UK domiciled individual resident in the UK may pay UK IHT on their worldwide assets under some circumstances, with a ‘deemed domicile’ provision in place to catch long term residents of the UK.
From April 2025, the tax liability for IHT will instead be based on residence rather than domicile.
Long term UK residents leaving the UK will now have a period, an “IHT tail”, whereby their worldwide assets will remain within the scope of UK IHT. This tail runs between 3 and 10 years depending on the length of time resident in the UK.
Long term residents who are not UK domiciled will attract UK IHT on their worldwide assets sooner under the new regime than the old ‘deemed domicile’ provisions. After 10 years of residency in the UK, their global assets will be chargeable to UK IHT.
One of the key consequences of this reform is its impact on individuals who are UK-domiciled (generally – born in the UK) but no longer UK resident. Under the current rules, their worldwide assets remain within the UK IHT net because of their domicile status. Under the new system, if they have been non-resident for a while, their non-UK assets may not be subject to UK IHT.
UK-based assets will still be subject to IHT, but this change provides a potential advantage for long-term non-residents who currently remain exposed to IHT on their global estate under the domicile-based system. Those who have been living abroad for a significant period should review their estate planning to assess whether they stand to benefit, and whether restructuring their investments could generate even further UK IHT benefits.
With this transition to a residence-based IHT system, it is essential for individuals—particularly those with complex residency histories or significant overseas assets—to review their estate plans. There may be planning opportunities to reduce IHT exposure, but careful consideration is needed.
Seeking professional advice is strongly recommended to ensure compliance with the new rules and to explore ways to manage IHT liabilities effectively.
If you have any questions or would like to discuss how these changes may affect you, please get in touch with your usual adviser.
