From April 2025, emphasis on an individual’s ‘domicile’ for IHT purposes will become largely redundant, and the current regime would be replaced with a ‘residence’ based system. This change is linked to the overhaul of the non-domiciled individual’s regime for income tax and capital gains tax purposes.
Now that Finance Bill 2024-25 has received Royal Assent (24 March 2025), it is time to take a thorough look at the new regime, how this compares to the old regime, and consider whether there are any tax planning opportunities that may arise for those who are contemplating leaving the UK.
Under the previous rules, individuals who are ‘non-domiciled’ have only been chargeable to UK IHT on their UK situs assets, meaning any assets situated outside of the UK can pass completely free of UK IHT (unless there is value attributable to UK Residential Property).
From 6 April 2017, the scope of these rules changed with the introduction of the ‘deemed-domicile’ provisions – effectively once an individual had been UK tax resident for more than 15 of the previous 20 tax years, they were ‘deemed UK domiciled’ for IHT purposes and their worldwide estate fell within the scope (subject to the availability of double taxation relief where the estate is subject to similar taxes in an overseas country).
The concept of domicile has featured consistently in case law over the years due to its ambiguity. It follows therefore that the new ‘residence’ based regime is likely to be more straightforward and provide more certainty for taxpayers regarding their exposure to UK IHT.
Essentially, under the new residence-based regime, an individual will be subject to UK IHT on their worldwide assets if they a Long-Term Resident (LTR). An LTR is an individual that has been UK tax resident in at least 10 of the last 20 tax years.
Where a LTR leaves the UK, their worldwide assets will remain within the scope of UK IHT for a set period – known as the ‘tail period’.
The length of the tail period depends on the number of years of UK residence. The minimum tail is three years which applies for those who have been UK resident for 10 to 13 of the past 20 years. The tail increases by 1 year for each year of residence, up to 10 years.
The transitional rules apply where an individual who is non-UK domiciled under common law (at 30 October 2024), becomes Non-UK Tax resident in the 2025/26 tax year. There is no requirement for the individual to have actually left the UK on or before 5 April 2025.
If the transitional rules apply, the non-UK Assets of those individuals will be outside the scope of UK IHT from 6 April 2028 if they do not return to the UK, this mirrors the previous treatment that applied for individuals who changed their domiciled status. If an individual who leaves the UK during 2025/26 later returns, the new rules will apply.
Compare this with becoming non-resident in the 2026/27 year – those individuals would not be outside the scope until 6 April 2036 – a full seven years later, because of one additional tax year of UK residence.
What can be done?
Non-domiciled individuals who are considering leaving the UK might consider seeking professional advice on whether their exit from the UK could be structured so as to make best use of the transitional rules.
To affect their residency status in the 2025/26 tax year, taxpayers must act swiftly, or risk being considered UK tax resident under the statutory residency test.
Practical Issues
There has been debate over how the new regime will be monitored – unless a non-resident has UK source income and is still required the submit a self-assessment tax return, there may be difficulties for HMRC to look at residency status for deceased individuals so detailed records in respect to moving dates and time spent in the UK should be kept.
Domicile will continue to be relevant in some cases, and demonstrating a non-UK domicile can be an onerous task. Where there is doubt over domicile, it is prudent for taxpayers to take advice on their position.
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