IHT opportunities for non-domiciles from 2025

Existing rules

Until 5 April 2025 (and subject to certain forestalling rules), inheritance tax (IHT) is a domicile-based tax. Thus a non-domiciled individual’s overseas assets escape IHT. In relation to trusts with a non-domiciled settlor, overseas assets added to the trust before the settlor becomes deemed domiciled are outside the scope of IHT.

Since April 2017, subject to the terms of any double tax treaty, a deemed domicile test treats anyone who is resident in the UK for 15 of the previous 20 years as UK domiciled. For this purpose, that includes any years as a minor and any split tax years when becoming or ceasing to be UK resident.

What’s changed?

From 6 April 2025, IHT will become a residence-based tax. Worldwide assets of an individual who is long-term UK resident at the date of the chargeable event, e.g. on death or lifetime transfer, will be liable to IHT. Those who leave the UK will remain within the IHT net for a period of between three and ten years depending on the length of previous UK residence. Hence it is very possible for IHT to apply to the worldwide assets of an individual who is non-resident on death.

IHT on offshore trusts will depend on the settlor’s long-term residence status at the time of each chargeable event, i.e. a death or occasion of a chargeable lifetime transfer.

Other connections with the UK, such as retaining a British passport, will be irrelevant to the IHT position.

Overseas assets gifted by a donor, who continues to benefit from the gift and is long-term resident on death, will be included in the donor’s death estate.

Long-term residence

From 6 April 2025, an individual is a long-term resident if they have been UK resident for at least ten out the last 20 tax years prior to the year of the chargeable event. For this purpose, years before April 2025 are counted, and split years and treaty relieved years are both counted as a year of residence.

Residence is determined by the statutory residence test which has numerous limbs based on the number of days in the UK as measured at midnight. For years prior to 2013/14, the older common law tests will be relevant.

Those under 20 years old will be long-term resident if they have been UK resident for at least 50% of the tax years in their lifetime.

To access unlimited exempt transfers between mixed residence spouses, an election will be available for the non-resident spouse to be treated as long-term resident.

Leaving the UK

When an individual ceases to be UK resident, they will remain within the scope of IHT on overseas assets for a further period (colloquially known as the “tail”) which is generally calculated by deducting ten years from the length of their previous UK residence, subject to a minimum result of three tax years and maximum of ten tax years. The clock will be entirely reset once an individual has been non-resident for a period of ten consecutive tax years.

This tail represents a substantial increase of time when overseas assets remain subject to IHT compared to the existing rules (where IHT falls away from the start of the fourth year of non-residence for non-domiciles).

Example. Rupert, who is non-domiciled, will have been in the UK from 2011/12 until 2027/18, a period of 16 tax years. After leaving the UK, his overseas assets remain liable to IHT until 2034/35, i.e. after six tax years have elapsed.

Example. James is UK domiciled and was resident in the UK until 2022/23. He will cease to be long-term resident on 6 April 2032.

Transitional rules

For non-domiciles at 30 October 2024 who are non-resident from 2025/26 onwards, the deemed domicile rules continue. In this case, overseas assets will only be within the scope of IHT where the individual is UK resident for 15 out of 20 tax years, and also UK resident in at least one of the four tax years prior to death.

Example. Murdoch is non-domiciled and UK resident since 2011/12. He will leave the UK on 31 March 2025, having been resident for 14 years. He dies in March 2029. In respect of 2028/29, Murdoch has not been resident for 15 out of the previous 20 tax years so he is not deemed domiciled. Therefore, his overseas assets are not liable to IHT.

Example. Prudence is non-domiciled and UK resident for 17 years until 2024/25 when she leaves the UK. She dies in March 2028. As three years have elapsed since UK residence, her overseas assets escape IHT.

Where a non-domiciled individual makes a lifetime transfer of overseas assets before becoming long-term resident, these will remain outside the scope of IHT even if the individual subsequently becomes long-term resident and death occurs within seven years of the gift. However, if the recipient of the transfer is a trust, the settlor’s ongoing residence status will be an issue.

Moving assets offshore or replacing UK assets with those offshore, in order to take advantage of the transitional rules, is prohibited.

The winners

The new regime should bring certainty as UK residence is fact based compared to the often nebulous concept of domicile. British expats who have already been non-resident for at least ten years will be able to return to the UK for a further ten years without their foreign assets falling within the IHT net. New arrivers can live in the UK for up to ten years before their overseas assets come within the IHT net.

Planning

It is vital to review future plans and asset portfolios to identity the amounts of IHT at stake. A lifetime gift of overseas assets before 6 April 2025 may be appropriate, as the usual seven-year period of survival is not required. For those who are intending to return to the UK sometime after 6 April 2025, they should consider waiting until they have been non-resident for at least ten tax years before doing so.

Substantial overseas assets held by those who have been resident between ten and 15 years could be transferred into trust before 6 April 2025 so long as the settlor or spouse are not beneficiaries. Although exit charges will apply, the assets will be sheltered from the settlor’s death estate, and careful management of residence would reduce or avoid a principal charge.

Non-domiciles who won’t be long-term UK resident for 2025/26 have a longer time to undertake this planning. For those intending to leave the UK before 6 April 2025, the current three-year tail will apply, although they must be careful not to return to the UK within ten years.