The UK’s new IHT regime: good news for British ex-pats

The changes to the UK’s new inheritance tax (IHT) regime, which were announced in Autumn 2024 Budget, potentially open significant opportunities for British ex-pats living around the world from 6 April 2025.

Previously, the worldwide estates of individuals with a domicile of origin in the UK remained subject to IHT unless they had succeeded in shedding their domicile of origin and acquiring a new domicile of choice in a distinct jurisdiction.

This involved moving to a country and forming a permanent or indefinite intention to remain there, which created difficulties for globally mobile individuals who did not settle in any one location. It was not possible to obtain a domicile ruling from HMRC, so the IHT position of many British ex-pats was uncertain.

From 6 April 2025, the UK government is replacing ‘domicile’ as a connecting factor for liability to applicable UK taxes, including inheritance tax (IHT), and adopting a residence-based regime instead.

Individuals who have been UK resident for at least 10 out of the past 20 tax years will be classified as a ‘Long-Term Resident’ (LTR) and exposed to IHT on their worldwide assets.

To ensure that LTRs do not escape tax obligations immediately upon leaving the UK, the legislation includes a ‘tail’ provision. This means that, if the LTR dies within the residence tail period, their worldwide estate 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.

With IHT now being based solely on residence, globally mobile individuals will have certainty as to whether IHT applies to their non-UK assets. Individuals who have been non-UK resident for 10 years by 6 April 2025 will be able to take advantage of this change with immediate effect.

Previously, the transfer of assets to a trust by an individual domiciled in the UK generally gave rise to an immediate IHT liability, as well as ongoing IHT consequences. As a result, there were risks for British ex-pats creating trusts when their domicile status was in doubt.

Certainty of IHT treatment of non-residents will open up opportunities for ex-pats who have been non-UK resident for a sufficient period to set up an overseas excluded property trust (offshore trust) after 6 April 2025 without any risk of an upfront IHT charge. This may be advantageous for asset protection or succession planning, as well as managing assets for future generations.

Furthermore, subject to the tax regime in their country of residence, gains and income accumulated within the trust may not be exposed to personal taxation. Many countries, even EU states such as Italy, Greece, Cyprus and Malta, have non-domicile tax regimes that only impose tax on income and gains that are either sourced locally or are remitted to the country of residence. Income and gains that remained within an offshore trust would not therefore be subject to taxation.

Consideration will only need to be given to the IHT treatment of the trust if the expat returns to live in the UK. A trust that is not initially within the scope of IHT will be brought within the scope of the tax if the settlor resumes residence in the UK and meets the 10 out of 20 years test.

It is also worth noting that a new four-year special tax regime will be introduced, under which qualifying individuals will be exempt from tax on their foreign income and gains (FIG) for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK. All individuals becoming UK resident after at least ten tax years of non-UK residence will be eligible for the special tax regime, regardless of their domicile.

Previously, an individual born in the UK with a domicile of origin in the UK who becomes UK resident was immediately treated as domiciled in the UK, and taxable on their worldwide income or gains.

British expats living abroad can take advantage of this favourable new regime to return to the UK for a short period, for business reasons, to care for elderly parents or to cease being resident in another jurisdiction for foreign tax planning reasons.

With the UK’s new statutory residence test in place, individuals will have certainty as to their residence status, so that they can clearly identify their first year of residence and the steps necessary to cease UK residence again, if desired.

For further information on the new UK IHT regime, or to receive information compiled by Sovereign’s Residency & Citizenship Services team on a comprehensive range of residency, citizenship and tax residency solutions, please contact Simon Denton below.