Overview
When taxpayers make the decision to leave the UK to move abroad, the ongoing impacts of UK Inheritance Tax “IHT” are often the last thing on their minds. It can come as a surprise to be told that exposure to IHT does not “die” when you cease to be UK-resident.
Whilst assets located in the UK will ALWAYS potentially be subject to IHT, what many don’t realise is that IHT can continue to extend to their foreign assets too!
Under the current UK tax legislation taxpayers who are domiciled in the UK or deemed-domiciled in the UK are subject to UK IHT on their worldwide assets. Unlike residence, which is relatively easy to change, changing your domicile requires a much more significant break and/or the passage of time.
The UK’s Autumn Budget 2024 was accompanied by the release of draft legislation to implement the removal of the concept of being non-UK domiciled from UK taxation, and that has resulted in a shift in the basis of the scope of Inheritance Tax too.
For some taxpayers, this will mean they are free from UK IHT on their foreign assets sooner than expected, for others it will mean it takes longer to shake-off this exposure. It will also mean that ensuring you don’t trigger the UK Statutory Residence Test “the SRT” when you make return trips to the UK is going to take on much more significance.
How Do the New IHT Rules Work?
From 6 April 2025 the scope of IHT will cease to be determined by the taxpayer’s domicile status instead being determined by their residence history (under the SRT).
Under the draft legislation, a new concept of “a long-term UK resident” is established.
Long-term UK residents will be subject to IHT on their worldwide assets, whereas taxpayers who are not Long-term UK residents will have the scope of IHT limited to their UK assets.
A taxpayer will become a Long-term UK resident when they have been UK resident (under the SRT) for at least 10 of the previous 20 years. By comparison, under the current legislation, it takes 15 years of residence in the previous 20 years to become deemed-domiciled in the UK.
There are some transitional measures for foreign domiciles already UK-resident, which mean that taxpayers who became UK-resident for the first time after the 2015-16 tax year will not immediately become a Long-term UK resident from 6 April 2025. The length of time before they do will depend on their residence history over the 19 years preceding 2025-26 tax year.
There are also some transitional measures for foreign domiciles who ceased to be UK-resident before 6 April 2025, to acknowledge the impact of the change of nexus for IHT.
Applying these transitional rules is complex.
Once the Long-Term UK-resident status has been triggered the taxpayer will normally need 10 consecutive years of non-UK residence before they will cease to be subject to IHT on their foreign assets.
It is important to understand your exposure to IHT as if your foreign assets are impacted it affects:
- How your will is drawn-up
- The tax consequences for your beneficiaries of inheriting your assets and
- Perhaps most importantly the consequences of succession planning actions, like establishing a family trust
Settling assets into a family trust can trigger an immediate lifetime charge to IHT – IHT is not simply a tax on your estate when you die!
I Don’t Live in the UK Anymore – Do These Changes Affect Me?
The short answer to that question is possibly, yes.
Perhaps the easiest way to look at it is by way of some examples:
Example 1
Jeevan is an Australian national who was resident in the UK from 2011-12 UK tax year. He left the Uk during 2024-25, to avoid becoming deemed-domiciled in the UK under the current rules. He returned to Australia and was non-resident in the UK for 2025-26.
Looking back over the 19 years preceding the 2025-26 tax year (ie 2006-07 to 2024-25), Jeevan was resident for 14 years, so he would normally meet the definition of “a long-term UK-resident” but we need to consider the transitional rules.
First, we need to consider whether in 19 years preceding the current year, he was non-resident in the UK for a consecutive period of at least 10 years. For Jeevan this is not the case, he was non-resident for 2006-07 to 2010-11, but that only totals 5 years.
Second, we need to consider the departing UK transitional measure. This considers the number of UK resident years in the 20 years ending with the last year the taxpayer was UK-resident and applies a table to determine the number of consecutive years the taxpayer must be non-resident in the UK to not meet the definition of “a long-term UK resident”.
In Jeevan’s case, the last year he was UK-resident was 2024-25, so we must consider the 20 years ending in 2024-25 i.e. 2005-06 to 2024-25. Looking at that 20-year period we need to determine the number of years Jeevan was UK-resident. He was UK-resident from 2011-12 to 2024-25, so 14 years. Applying 14 years to the table, that means Jeevan must be non-resident in the UK for 4 consecutive years before he ceases to be “a long-term UK resident”.
So provided he continues to be non-resident in the UK (under the SRT) Jeevan will cease to be subject to IHT on his foreign assets from 6 April 2029. Note though: if Jeevan retains any UK assets (eg his former home) these will remain subject to IHT
Example 2
Claire moved from Australia to the UK in January 2019 to take up a new UK employment opportunity. Prior to that she had lived in Australia her whole life.
She intends to return home to Australia permanently in early December 2026, to enjoy Christmas with her ageing parents.
Claire is leaving the UK in the 2026-27 tax year, so this will be the last year she is UK-resident. She was resident from 2018-19 to 2026-27, which is 9 years. So, Claire will not be “a long-term UK-resident” at the time of her departure from the UK.
So IHT will only apply to any UK assets Claire retains.
If you left the UK in 2015-16 or later, or you are planning to leave the UK soon, your Fairway Team would be happy to assist you in determining when the IHT exposure to your foreign assets will cease under the new rules.
Changes to the Rules on Excluded Property Trusts
As part of these changes the new Government’s draft legislation proposes to bring any settlor-interested trusts of “Long-term UK-residents” within the scope of IHT, even when these trusts were Excluded Property Trusts under the current tax rules.
Since most Australian Family Trusts would meet the definition of Settlor-Interested Trusts, this is very significant for many of our clients.
Please contact your Fairway Team to understand how these changes might impact your trusts.
Plans to Bring Pensions within the Scope of IHT
As part of the Autumn 2024 Budget documents a consultation was released in relation to the Government’s plans to bring unused pension fund balances within scope to IHT from 6 April 2027.
At present, UK registered pension fund balances (and many foreign pension balances) are excluded from Inheritance Tax. If these proposals go ahead, this is a very significant change, exposing, often high-value balances, built up in UK and non-UK retirement funds to 40% IHT on death.
The consultation will run for 12 weeks between 30 October 2024 and 22 January 2025. Normally we would then expect to see feedback from the consultation before the introduction of draft legislation to Parliament.
It will therefore be some time before we know whether these proposals will go ahead and if so, what the legislation will look like and whether there will be any transitional measures.
Keep watching our website for updates, as they become available.
DISCLAIMER: The following information is based on published Government policy papers and draft tax legislation. These measures will not become law until enacted, through the legislation passing both Houses of Parliament and receiving Royal Assent. It is possible that the draft legislation may be altered in its passage through Parliament.
