Protecting your worldwide assets from the UK’s new Long-Term Resident IHT rules
The UK government announced in its Autumn Budget last October that, from 6 April 2025, it is replacing ‘domicile’ as a connecting factor for liability to applicable UK taxes, including inheritance tax (IHT), and adopting a residence-based regime instead.
Accordingly, as from 6 April 2025, individuals who have been UK resident for at least 10 out of the past 20 tax years – for example, a person who was UK resident for 11 tax years from 6 April 2014 to 5 April 2024 – will be classified as a ‘Long-Term Resident’ (LTR) and exposed to IHT on their worldwide assets.
To ensure that long-term UK residents do not escape tax obligations immediately upon leaving the UK, the legislation also introduces a ‘tail’ provision. This means, if they pass away within the residence tail period, the worldwide estate of an LTR will still be subject to UK IHT for up to 10 years after they cease to be a UK resident.
The length of the tail will depend on the duration of the individual’s residence in the UK. The minimum length of the tail is three years, which applies to individuals who have been UK residents for 10 to 13 of the past 20 UK tax years. The length of the tail increases by one tax year for each additional year of residence, up to a maximum of ten years.
Individuals who do not meet the criteria for LTR status will generally remain liable for IHT on UK-based assets only. This aligns with the previous system, under which non-UK domiciled individuals were taxed on UK situs assets but non-UK assets were out of scope for IHT purposes.
For LTRs who have moved to Portugal, or wish to, this could present a serious problem; the residence tail provision may extend their UK IHT liability on non-UK assets for several years post-residency. It will particularly impact individuals with global property holdings, offshore trusts, or diversified investment portfolios.
Former UK residents assessing their potential IHT exposure should, as a first step, review the history of their UK residency to determine whether they meet the threshold for LTR status. They should also review their global asset structures because the residence tail could expose previously sheltered non-UK assets to tax.
Although the domicile concept is being replaced for tax purposes, it may remain relevant in certain trust and estate planning structures. For individuals holding assets in trusts established before April 2025, legacy rules may still provide certain exemptions or protections.
It may also be worth considering taking out IHT insurance. Insurance cover has long been a useful tool to protect lifetime gifts of property and assets, known as known as potentially exempt transfers (PETs). Gifts made from an individual’s estate are exempt from IHT provided they survive for a period of seven years after the date the gift is made.
But if an individual dies within this seven-year period, there is still a potential IHT liability. The most common way of protecting the beneficiaries of these gifts from the potential tax liability is to set up life assurance policies to cover the potential liability. The insurance policy doesn’t alter the IHT liability but will pay out a lump sum to meet the IHT bill.
Similarly, life assurance policies can be set up to cover the potential liability to UK IHT if an LTR policy holder was to pass away within the applicable residence tail period, up to 10 years, after they cease to be a UK resident.
It is strongly recommended that such life assurance policies should be placed into trust. This ensures that any pay-out is not considered part of the estate, which would defeat the purpose of the cover. It also means the policy does not get caught up in probate, so beneficiaries can be paid quickly and can settle the liability as soon as possible.
If you are or are likely to be classified as an LTR and exposed to UK IHT on your worldwide assets for a period of up to 10 years, a life assurance policy can give you peace of mind that your beneficiaries won’t be subject to a huge IHT bill if you don’t survive through the whole of the residence tail period.
It is essential to get expert advice before taking out any policy – especially given the new rules about registering trusts.
For any further information on the changes to the UK’s IHT regime, or to talk to us about your IHT planning, please contact our Portugal office. Our services will be tailored to your individual circumstances and are designed to help you plan for your future.
