From 6 April 2025, the UK will move to a new residence-based system for Inheritance Tax (IHT), marking one of the most significant shifts in the taxation of wealth in recent decades. These changes will affect not only long-term UK residents, but also internationally mobile individuals who may have previously relied on their non-domiciled status for IHT planning.
What Is Changing?
At present, UK IHT is based on domicile. UK domiciliaries are taxed on their worldwide assets, while non-doms are only subject to IHT on their UK situs assets, unless they become “deemed domiciled” after 15 years of UK tax residence.
From 6 April 2025, the domicile test will be replaced. Under the new rules:
- Individuals who have been UK tax resident for at least 10 out of the previous 20 tax years will become long-term residents and fall within the scope of UK IHT on their worldwide estate.
- Long term resident individuals who leave the UK will continue to be exposed to UK IHT on their worldwide assets for a period ranging from 3 to 10 years, depending on how long they were UK resident before departure.
What About Trusts?
The treatment of Trusts will also change. From 6 April 2025, trusts will no longer provide protection from UK taxation on income or gains arising within them. While there will remain an element of IHT protection, these Trusts will be brought within the UK’s relevant property regime.
This means:
- Trusts will be subject to IHT charges of up to 6% every 10 years on the value of the assets within the Trust
- An additional exit charge may apply when capital is distributed.
- Once in the relevant property regime, a further pro rata exit charge will apply if and when the settlor ceases to be a long-term UK resident.
It could take seven full 10-year cycles of IHT charges at 6% for the tax payable by a Trust to exceed the IHT payable if the same assets were held personally and taxed at 40% on death. Nonetheless, the administrative burden and cashflow impact of these periodic and exit charges should not be underestimated.
Broader Changes on the Horizon
Alongside the shift to residence-based taxation, further IHT reforms are expected in the coming years:
- From 6 April 2026, the Government plans to introduce a cap on Business Relief and Agricultural Relief, limiting 100% relief to the first £1 million of qualifying assets.
From 6 April 2027, unused pension funds will also become subject to IHT on death,
What Does This Mean in Practice?
Now that the new rules are in force, many long-standing estate plans and asset-holding structures must be reassessed under the new regime.
This includes:
- Reviewing the relevance and efficiency of existing offshore Trusts.
- Reassessing asset ownership between family members and across jurisdictions.
- Ensuring clear documentation for residency status and historic Trust arrangements.
The new residence-based approach brings complexity, particularly for internationally mobile individuals and non-doms who previously relied on the excluded property regime. While the window for new planning has now closed, it remains important to ensure that existing structures are compliant and do not trigger unnecessary tax exposure under the new rules.
Final Thoughts
The move to a residence-based IHT regime represents a fundamental change in how the UK taxes wealth at death. For those with international lives or assets, this is a key moment to take stock. For more information on this or to speak to one of our experts, please use our enquiry form or email us at hello@dixcartuk.com.
At Dixcart, we work closely with individuals and families to provide clear, tailored advice in light of changing legislation.
