Inheritance tax reform – long-term residence in the UK

The UK Government’s decision to move from a domicile-based to a residence-based inheritance tax (IHT) regime with effect from 6 April 2025 marks a seismic change for British expatriates considering their tax and succession plans. The reforms introduce the concept of the Long-Term Resident (LTR), with implications that extend well beyond UK borders. For individuals with international ties, understanding how the new framework works both in theory and in practice will be essential in ensuring they minimise their UK tax exposure and maximise their future family wealth.

What was the previous system?

Prior to 6 April 2025, IHT liability was determined by domicile. Individuals who were UK domiciled, or deemed domiciled, were subject to IHT on their global assets. Those who were not domiciled in the UK were only caught by the UK IHT regime for assets situated in the UK. The deemed domicile rules extended this IHT net to non-UK domiciled individuals who had been UK residents for 15 out of the previous 20 years.

It was not uncommon to see expatriates who had spent many years overseas and who held all their wealth overseas remaining within the charge to UK IHT as they had not taken sufficient steps to lose their UK domicile status. A stated intention to return “home” in the future may have been sufficient for an individual to retain their UK domicile.

Domicile was seen as a grey area and inconsistent with other areas of tax law governed by statutory rules.

What is the new residence-based test?

From 6 April 2025, individuals who have been UK tax residents for 10 out of the previous 20 tax years will be deemed LTRs and subject to IHT on their worldwide estate. UK tax residence will be determined according to the Statutory Residence Test (SRT), which is already used to determine liability for income and capital gains tax.

Importantly, a “tail” provision applies individuals who cease UK residence after acquiring LTR status will remain within the IHT net for up to 10 years, depending on their prior residency history.

What are the implications?

1. The changes may benefit UK expatriates who have retained domicile in the UK but have been resident outside the UK for 10 years or more. Such individuals may no longer be liable to IHT on their non-UK assets.
2. Non-UK domiciled individuals who are UK residents will become liable to IHT on their worldwide assets sooner than under the previous IHT rules – 10 years instead of 15 years.
3. Historically, trusts established by an individual (the settlor) while non-UK domiciled had ‘excluded property’ status and foreign assets would be protected from IHT even after the individual acquired domicile in the UK. Trusts may now lose their excluded property status if the settlor is a LTR at the time of a chargeable event, such as the Trustees appointing assets to beneficiaries. This may result in IHT charges of up to 6%. If a settlor ceases to be LTR and trust assets become excluded property an IHT charge may be triggered.

What steps should be taken?

1. Monitor UK presence – tracking time spent in the UK is critical. Even short visits can accumulate toward the 10-year threshold. Forward planning and good record-keeping are essential.
2. Gifting before acquiring LTR status – lifetime gifting before assets fall within the IHT net may mitigate future liability to IHT.
3. Review trusts and wills – trusts should be reviewed to assess exposure under the new rules. Wills may need updating to reflect changes in reliefs and allowances, particularly where international assets are involved

How we can help

The move to a residence-based IHT regime represents a fundamental change in UK tax policy. Understanding the SRT, reassessing trusts, and reviewing succession strategies will be key to navigating this new landscape.

At Anderson Strathern, we are advising clients across jurisdictions on how best to prepare for these changes. If you would like to discuss your position or explore planning options, please contact us here or email alison.pryde@andersonstrathern.co.uk.