Residence & Inheritance Tax Planning

When you have assets in multiple countries, understanding how UK Inheritance Tax (IHT) applies to your worldwide estate is a critical part of any financial plan. Following landmark reforms introduced from 6 April 2025, the rules determining your IHT exposure have changed fundamentally moving away from the concept of domicile towards a system based primarily on UK residence. Without specialist advice, you could face an unexpected and significant IHT liability on assets you never anticipated would fall within the scope of UK tax.

Our residence & IHT tax services

Our Tax team has specialist expertise in advising internationally mobile individuals and families on their UK IHT position under both the old and new regimes. We can help you understand your current exposure and put in place a plan to manage it effectively and efficiently. We can support you with the following services:

• Reviewing your IHT position in light of the new residence-based rules so you understand exactly what is at risk.
• Helping you assess whether you have reached or are approaching Long Term Resident (LTR) status and what this means for your worldwide estate.
• Advising those leaving the UK on the extended IHT tail and how to plan around it.
• Reviewing existing Trust structures and excluded property arrangements in light of the new rules.
• Assisting with Will planning and estate structuring for internationally mobile individuals and families.
• Registering you for self-assessment and completing UK returns on your behalf where required.

What changed on 6 April 2025?

Prior to 6 April 2025, your exposure to UK IHT on worldwide assets was determined primarily by your domicile status. A UK domiciled or deemed domiciled individual was subject to IHT on their entire worldwide estate, whilst a non-UK domiciled individual was only exposed to IHT on assets physically located in the UK.

From 6 April 2025, this framework was fundamentally reformed:

• The concept of deemed domicile for IHT purposes was abolished
• A new Long Term Resident (LTR) test based on years of UK residence replaced it
• Worldwide IHT exposure is now triggered by length of UK residence rather than domicile status
• Importantly, those who leave the UK after acquiring LTR status remain exposed to worldwide IHT for an extended tail period which can be as long as 10 years

These are the most significant changes to IHT residence rules in decades and affect anyone who has spent, or is planning to spend, a substantial period of time in the UK.

What is my residence status?

As with income tax and CGT, UK residence for IHT purposes is determined by the Statutory Residence Test (SRT), which considers factors including:

• The number of days spent in the UK during the tax year
• Ties to the UK such as family, accommodation, and work
• The pattern and purpose of visits to the UK

An individual will always be considered UK resident if they spend 183 days or more in the UK in a tax year. If you are unsure of your residence status, a calculator is available on https://www.gov.uk/tax-foreign-income/residence to assist.

Keeping an accurate record of days spent in the UK is essential, particularly for those approaching the LTR threshold.

 

What is the Long Term Resident (LTR) test?

The LTR test is the cornerstone of the new IHT regime. It works as follows:

• An individual becomes a Long Term Resident once they have been UK resident for at least 10 out of the last 20 tax years.
• Once LTR status is acquired, the individual becomes subject to IHT on their worldwide assets, not just UK assets.
• This mirrors the position that previously applied to those who were deemed domiciled under the old 15 out of 20 year test, but the threshold is reached more quickly under the new rules.

What happens when you leave the UK?

One of the most significant and potentially surprising aspects of the new rules is the IHT tail that applies to those who leave the UK after acquiring LTR status.

Under the old regime, a non-domiciled individual who left the UK could escape worldwide IHT exposure relatively quickly. Under the new rules this is no longer the case:

Years of UK Residence Completed	IHT Tail Period After Leaving UK
10 to 13 years	3 years
14 to 16 years	4 years
17 to 19 years	5 years
20 or more years	10 years

This means a long term UK resident who leaves the UK could remain exposed to worldwide IHT for up to a decade after departure. This is a critical planning consideration for anyone contemplating leaving the UK.

Does domicile still matter for IHT?

Whilst the new LTR test has largely replaced deemed domicile as the trigger for worldwide IHT exposure, actual domicile remains relevant in the following circumstances:

• A UK domiciled individual whether by domicile of origin or domicile of choice remains subject to IHT on their worldwide assets regardless of residence
• Those with a non-UK domicile who have not reached LTR status remain subject to IHT only on UK situs assets
• Trust structures the domicile of the settlor at the time a trust was established can still be relevant to how the trust is treated for IHT
• Transitional provisions those who were deemed domiciled under the old rules may have specific transitional considerations where historic domicile planning remains relevant

Domicile should therefore not be disregarded entirely it continues to interact with the new residence-based rules in important ways.

What assets are subject to IHT?

For long term residents and UK domiciled individuals

IHT applies to worldwide assets, including:

• UK and overseas property and land
• Cash and investments held anywhere in the world
• Business interests wherever located
• Personal possessions worldwide

For non-LTR / non-UK domiciled individuals:

IHT applies only to UK situs assets, which include:

• UK land and property
• UK registered shares and securities
• Assets physically located in the UK
• UK bank accounts in certain circumstances

How is IHT Calculated?

The standard IHT calculation remains unchanged:

• The first £325,000 of the taxable estate is covered by the Nil Rate Band (NRB) and taxed at 0%
• An additional Residence Nil Rate Band (RNRB) of £175,000 is available where a residential property is left to direct descendants
• Everything above the available thresholds is taxed at 40%
• A reduced rate of 36% applies where at least 10% of the net estate is left to charity

These thresholds are currently frozen until 2030.

The Spouse Exemption - Key Considerations

Transfers between spouses and civil partners are generally exempt from IHT. However, under the new rules:

• Where both spouses are UK domiciled or LTR, the full spousal exemption applies
• Where the receiving spouse is non-LTR and non-UK domiciled, the exemption may be restricted
• The interaction between the spousal exemption and the new LTR rules is a complex area and specialist advice should be taken, particularly for internationally mobile couples

It is also important to note that the spousal exemption does not apply to unmarried couples regardless of residence or domicile status making Will planning and life insurance arrangements particularly important for those who are not married or in a civil partnership.

Transitional Provisions

For those who were previously deemed domiciled under the old 15 out of 20 year test, or who had structured their affairs around the old domicile-based rules, a number of transitional provisions were introduced:

• Existing excluded property trusts established before the changes may retain some protection for assets settled before LTR status was acquired, though this is subject to complex rules
• Those transitioning from deemed domicile to the new LTR framework should review their position carefully as the timing of the changeover may create both risks and opportunities
• Will planning that was structured around the old domicile rules should be reviewed and updated as a matter of priority

These transitional provisions are complex and in some cases time-limited early advice is essential.

How we can help

We advise a wide range of clients on their IHT position under the new residence-based regime, including:

• Individuals approaching LTR status who wish to understand and manage their exposure before the threshold is crossed
• Those leaving the UK who need to understand the tail period and plan accordingly
• Non-UK domiciled individuals with UK situs assets who wish to restructure their affairs efficiently
• Long term UK residents who are now exposed to worldwide IHT for the first time under the new rules
• Internationally mobile families with complex cross-border estates requiring coordinated planning across multiple jurisdictions
• Those with existing trust structures that need to be reviewed in light of the reforms

Residence and IHT is a rapidly evolving area of tax law and the April 2025 reforms have introduced significant new risks but also genuine planning opportunities for internationally mobile individuals. It is always better to seek advice at an early stage, before decisions are made and before thresholds are crossed, as the financial consequences of getting this wrong can be substantial.

If you would like to speak to our team regarding your IHT position under the new rules, please contact a member of our tax planning team.