Major changes to Inheritance Tax from April – How new residence rules and the end of non-dom status could affect your estate
Major reforms to the UK’s Inheritance Tax (IHT) regime are on the horizon, with sweeping changes, particularly affecting non-domiciled individuals (non-doms) set to take effect from 6 April 2025.
At the heart of these reforms is a move away from the current domicile-based framework to a residence-based system.
For many people, particularly non-UK domiciled persons residing in the UK, this could affect their estate planning and succession strategies.
Moving from domicile to residence
Currently, an individual’s exposure to IHT on non-UK assets hinges on whether they are UK domiciled, or deemed domiciled, under specific rules.
From April 2025, this will change. The concept of domicile will no longer determine the liability for IHT on non-UK assets.
Instead, the focus will shift to an individual’s long-term residence status.
An individual will be classified as a long-term resident once they have spent 10 out of the previous 20 tax years resident in the UK.
This is assessed using the same statutory residence test currently applied for Income Tax and Capital Gains Tax (CGT) purposes.
Once someone meets this threshold, all their worldwide assets (including non-UK assets) will be subject to IHT, effective from the start of their eleventh year of UK residence.
What happens after you leave the UK?
A notable addition to the new rules is the so-called Inheritance Tax tail.
Even after an individual ceases UK residence, their worldwide estate won’t immediately fall outside the UK’s IHT net.
Instead, there will be a ‘tail’ period of continued IHT exposure, lasting between three and ten years, depending on the length of their previous UK residence.
For instance, those resident in the UK for 10 to 13 years will face a three-year tail. For each additional year of residence beyond this, the tail extends by one year, up to a maximum of 10 years.
However, there is some relief for non-UK domiciled individuals who exit the UK before the changes take effect.
Transitional rules mean that those non-resident during the 2025/26 tax year, and able to demonstrate a non-UK domicile status as of 30 October 2024, will retain a fixed three-year tail, regardless of how long they were a UK resident prior to leaving.
Trusts under scrutiny
Trusts have long been a favoured tool for non-UK domiciled individuals to safeguard non-UK assets from IHT.
However, the reforms alter the treatment of trusts from April 2025.
Going forward, the excluded property status of non-UK assets settled into trust will depend on the settlor’s residence status.
If the settlor is a long-term UK resident when a chargeable event (such as a 10-year anniversary or capital distribution) arises, those non-UK assets will fall within the IHT net.
While trusts settled before 30 October 2024 will benefit from certain transitional protections (shielded from the gift with reservation of benefit rules), they will still be subject to ongoing relevant property charges of up to six per cent.
Additionally, if a settlor becomes non-resident and loses their long-term resident status, an exit charge may apply to assets reverting to excluded property status.
Other factors to consider
The reach of these reforms does not stop there.
Individuals with agricultural or trading businesses based outside the UK should be aware that changes to Agricultural Property Relief (APR) and Business Relief (BR) are also scheduled for 6 April 2026.
These reliefs will be capped at £1 million of qualifying assets, with only partial relief available above that threshold, potentially increasing IHT liabilities.
While the UK’s estate tax treaties remain unaffected by these reforms, establishing whether you qualify for treaty protection may still require a careful review of your domicile status under common law.
Steps to take now
With the clock ticking, proactive planning is essential. Some key areas to review are below:
- Succession arrangements – Re-evaluate wills and succession strategies in light of the new residence rules.
- Trust structures – Consider whether existing trust arrangements still achieve the desired outcomes under the revised IHT framework.
- Asset ownership – Explore alternatives such as family investment companies, partnerships or lifetime gifting strategies, particularly before 6 April 2025.
- Liquidity planning – Ensure that funds are available to meet potential IHT liabilities, possibly through life insurance.
- Residence and domicile status – If considering leaving the UK, assess your residence position under the statutory residence test, and review your domicile status for transitional relief eligibility.
While these changes may limit some traditional planning routes, there are still opportunities to structure affairs efficiently, provided action is taken in good time.
If you would like advice on how these reforms may affect you, please get in touch with our Inheritance Tax specialists today.
