UK Inheritance Tax 2025: What Expats Need to Know About the New Residence-Based Rules

Navigating the New IHT Rules:

“Just when you thought you'd mastered the fine print of UK tax laws, the 2024 Autumn Budget decides to throw in a twist: goodbye, ‘non-dom’ status, and hello, a new residency rule for Inheritance Tax. For expats who’ve strategically positioned their financial chess pieces worldwide, this change is a plot twist worth paying attention to! Let’s break down what the new residence-based rules mean for your global assets, and your peace of mind.”

The UK’s 2024 Autumn Budget introduced a significant overhaul to the inheritance tax (IHT) system by abolishing the “non-dom” tax status from April 2025. Replacing the long-standing domicile-based IHT system with a new, residence-based regime, these changes impact UK residents and expats alike. This shift has major implications for those considering retirement abroad or returning to the UK after years overseas.

The Old vs. New IHT Regime: Key Changes

Under the previous IHT system, tax liability was based on an individual’s domicile status, generally determined by deep-rooted connections to a country, often from birth or long-term family ties. This meant:

• UK-Domiciled Individuals: Were liable for IHT on their worldwide assets, regardless of where they lived.
• Non-UK Domiciled Individuals: Only paid IHT on their UK-based assets, offering significant tax relief for global assets if a person established a non-UK domicile.

From April 2025, this domicile-based approach will be replaced with a residence-based IHT system, meaning tax liability will now be tied directly to UK residency rather than domicile status. The major shifts under the new rules include:

• UK Residents: Will be subject to IHT on worldwide assets after 10 years of UK residency.
• Non-UK Residents: Even if living abroad, individuals remain subject to UK IHT on their global assets for 10 years after leaving the UK. This period, termed the “10-year tail,” brings a new layer of tax exposure for those with significant assets abroad.

This transformation means a far-reaching impact on UK expats and those planning to repatriate, as the UK tax system will now extend its reach over global estates more firmly.

Implications for Expats Retiring Abroad

For expats planning to retire abroad, the shift to a residence-based system introduces new considerations, primarily around the extended exposure to IHT even after leaving the UK:

1. IHT Liability Extends Beyond Departure: With the new rules, UK expats will remain liable for IHT on their worldwide assets for 10 years after establishing non-residency in the UK. This “10-year tail” period can significantly impact estate planning, as it means that even years after moving abroad, IHT obligations continue.
2. Importance of Timing in Establishing Non-UK Residency: Careful planning around the timing of establishing non-UK residency can help minimise IHT exposure. Expats may wish to ensure they qualify as non-resident well before retirement to avoid the 10-year tail extending deep into their retirement years. However, the 10-year extension still places additional emphasis on early planning.
3. Utilising Cross-Border Estate Planning Solutions: Exploring options such as trusts or asset transfers outside of the UK may help manage exposure during the 10-year period. Cross-border estate planning and guidance from an international tax adviser can ensure the right approach to managing these assets in line with the new rules.

Considerations for Repatriating Expats

For expats who may be planning to return to the UK, the residence-based IHT system means that upon re-establishing UK residency, worldwide assets will once again fall within UK IHT scope. Key points to consider include:

1. Reintroduction of Worldwide IHT Liability: Upon returning to the UK and becoming a resident, expats will be subject to UK IHT on their global assets after 10 years. This means that any international property, investments, or foreign accounts would come back under UK tax jurisdiction.
2. Re-Evaluating Trusts and Estate Plans: Those with existing overseas trusts or cross-border estate plans should review them in light of the new rules. Some trusts may lose their previous tax advantages, and adjusting structures to comply with new regulations could reduce tax exposure.
3. Impact on Mixed-Domicile Couples: If one partner is non-UK resident and the other is resident, IHT liabilities on worldwide assets could still apply. Understanding the nuances of this situation and structuring assets strategically can help maximise any available exemptions.

Strategies for Navigating the New IHT Landscape

Whether retiring abroad or returning to the UK, expats should consider these strategies for managing IHT effectively under the new residence-based system:

1. Plan for Long-Term IHT Exposure: With the 10-year tail, even non-residents are not fully free from UK IHT. Early, proactive planning can help establish strategies like annual gifting, which reduces IHT on the total estate value. Expats can also consider restructuring overseas assets to better protect them from UK IHT liability during this tail period.
2. Explore Double Taxation Agreements (DTAs): Some countries have DTAs with the UK, which can help alleviate double taxation on assets in both countries. Understanding how DTAs apply to your estate could ease the impact of the 10-year tail, especially if you own property or hold substantial investments overseas.
3. Use of Life Insurance Policies: Life insurance policies can provide funds to cover potential IHT liabilities, ensuring that beneficiaries are not forced to liquidate assets. As part of an overall estate plan, life insurance policies structured to cover IHT liabilities can provide peace of mind and additional security.
4. Seek Professional Cross-Border Advice: The new rules add a layer of complexity, especially for those with assets across multiple jurisdictions. An international tax adviser can guide you on structuring your assets efficiently, minimising exposure, and ensuring compliance.

Final Thoughts

The shift to a residence-based IHT system in the UK represents a profound change for expats. Whether you’re planning to retire abroad or return to the UK, the new rules require careful consideration and early planning to safeguard your estate. With the right guidance, you can manage your assets in a way that aligns with your future plans and minimises potential tax liabilities.

By understanding the implications of the new IHT rules and taking proactive steps, expats can ensure their financial legacy remains secure, providing confidence and peace of mind for themselves and their loved ones.

“So, whether you’re retiring on a beach in Bali or planning your return to the rainy (but lovely) UK, the new residence-based IHT rules are here to stay. As always, the taxman may be unavoidable, but with some savvy planning, you can keep him from hogging too much of your legacy. Cheers to a well-planned future and a tax bill that’s a little less taxing!”

Written by Dion Angove, Financial Planner for Expats!

Personal Bio - https://about.me/angove

Email - [email protected]

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