The UK government has announced a landmark reform to the Inheritance Tax (IHT) regime, fundamentally altering how individuals and trusts are taxed on their worldwide assets. From 6 April 2025, the IHT system shifted from a domicile-based approach to a residence-based regime.
The end of domicile for IHT: introduction of the long-term UK residence test
Historically, liability to UK IHT has depended on an individual’s domicile status. Non-UK domiciled individuals have generally only been subject to IHT on their UK assets, with non-UK assets treated as “excluded property.” From 6 April 2025, this will change dramatically.
IHT exposure will now be determined by whether an individual is a “long-term UK resident.” The concept of domicile (and deemed domicile) will be abolished for IHT purposes.
Who is a Long-Term UK resident?
An individual will be classed as a long-term UK resident if they have been UK tax resident for at least 10 out of the previous 20 tax years. The residence test will be determined using the statutory residence test.
When a long-term resident leaves the UK, their worldwide assets will remain within the scope of inheritance tax for a number of years. The minimum length of the inheritance tax tail is three years which applies to individuals who have been residents for 10 to 13 of the last 20 tax years. The length of the tail as demonstrated in the chart below increases by one tax year for each additional tax year of residence up to a maximum of 10 years. An individual’s exposure to inheritance tax on his non-UK assets cannot therefore be removed by simply leaving the UK.
| Number of years resident | IHT tail |
| 13 or less | 3 |
| 14 | 4 |
| 15 | 5 |
| 16 | 6 |
| 17 | 7 |
| 18 | 8 |
| 19 | 9 |
| 20 | 10 |
Impact on trusts
Trusts still offer attractive succession planning and asset protection for wealthy families. However, from 6 April 2025, the IHT status of non-UK assets comprised in a trust will not be fixed by reference to the settlor’s domicile but will depend whether the settlor is a long-term resident on the date of the IHT charge. The IHT status of a trust can therefore change throughout the life of the settlor.
- If a settlor is a long-term resident and dies after 6 April 2025, the non-UK assets will continue to be within the charge to IHT throughout the lifetime of the trust.
- If the settlor died before 6 April 2025 the non-UK assets will be outside the scope of IHT for the remaining life of the trust if he was non-UK domiciled at the time the assets became comprised in the trust.
- If the settlor is not a long-term resident and dies after 6 April 2025, the trust assets remain outside the scope of IHT for the remaining life of the trust.
Where the settlor ceases to be a long-term resident this will give rise to a deemed exit charge.
Trustees and settlors should review existing trust structures in light of the new rules. The residence status of the settlor will be key in determining whether non-UK assets remain outside the scope of IHT. The exit charge for long term resident settlors moving abroad could be punitive so care should be taken to avoid long-term residence status, if at all possible, in these situations.
What should you do now?
- Review residence history: Individuals who have spent significant time in the UK should assess whether they will be classed as long-term UK residents from April 2025.
- Review the residence status of settlors: This will determine the current inheritance tax status of the trust. If the settlor is planning to leave the UK, careful planning is required.
- Trust review: If they have not already, Trustees and settlors should review trust structures, especially those involving non-UK assets, to determine whether restructuring or winding up should be considered.
Conclusion
The move to a residence-based IHT regime represents the most significant change to UK inheritance tax in decades. The abolition of domicile as the key test for IHT exposure will have far-reaching consequences for international families, non-UK domiciliaries, and trustees. Early review and planning are essential to ensure that structures remain fit for purpose and to take advantage of transitional protections where available.
For tailored advice on how these changes may affect your estate or trust, please contact our private client team on privateclient&trusts@haysmac.com.
