Upcoming Changes to UK Inheritance Tax
What You Need to Know
As of 6 April 2025, significant changes to the UK’s inheritance tax (IHT) system are set to come into effect. These changes mark a substantial shift from the traditional domicile-based approach to a new residence-based system. Announced by the Labour Government, the reforms will have far-reaching implications for individuals, particularly those who are non-UK domiciled or internationally mobile.
The New Residence-Based System
Under the current rules, IHT liability is determined by an individual’s domicile status. UK domiciliaries are taxed on their worldwide assets. In contrast, non-domiciled individuals are generally only liable for IHT on assets situated in the UK, unless they have been UK resident for 15 out of the past 20 years, at which point they become “deemed domiciled”.
From 6 April 2025, the concept of domicile will be replaced by the concept of a ‘long-term resident’. An individual will be considered a long-term resident if they have been UK tax resident for at least 10 out of the previous 20 tax years. Once classified in this way, individuals will be subject to IHT on their worldwide assets, not just those located in the UK.
Implications for Long-Term Residents
This new approach increases the scope of IHT. If someone qualifies as a long-term resident, their global assets will be brought within the UK IHT net. This includes assets held in trusts, which will also face IHT charges at relevant chargeable events if the person who created the trust is a long-term resident. There are certain transitional provisions in place for trusts that were established before 30 October 2024.
Post-Departure Liability
To prevent individuals from avoiding tax through relocation, the new system introduces a “tail provision”. This means that once a person meets the 10-year residency requirement, they will remain liable for IHT on their worldwide assets for between three and ten years after leaving the UK. The intention is to ensure that long-term residents who have benefited from UK services and infrastructure cannot simply move away to avoid tax at the time of a chargeable event, such as death.
Impact on Trusts
Trusts, often used in estate planning, will also be affected by the changes. Trusts that hold non-UK assets will be subject to IHT charges if the settlor meets the new long-term resident criteria. These changes make it essential to review existing trust arrangements to ensure they remain tax efficient and compliant with the updated rules.
Freezing of IHT Thresholds
Alongside the adjustments to residency criteria, the government has confirmed that the IHT nil-rate band of £325,000 and the residence nil-rate band of £175,000 will remain frozen until at least 2030. With rising property prices and inflation, an increasing number of estates will surpass these thresholds, leading to higher IHT liabilities without any changes to headline tax rates.
Planning and Strategies
Given the scope of these reforms, it is more important than ever to evaluate your estate planning. Consider the following strategies:
Asset Holding
Review how and where your assets are held. This may mean restructuring ownership or considering relocating some assets to alternative jurisdictions.
Succession Arrangements
Update your succession plans to reflect the new residence-based IHT rules. It may be necessary to revisit existing wills, trusts, and other estate planning documents.
Transaction Timing
Be strategic about the timing of significant financial transactions. This includes reviewing when and how gifts or asset transfers are made to potentially avoid or defer IHT charges.
Liquidity Needs
Ensure your estate has sufficient liquidity to meet any IHT obligations. Solutions might include securing appropriate life insurance or other financial planning measures.
Mobility Considerations
For individuals who frequently move between countries, understanding the implications of the “tail provision” is crucial. It is important to weigh the tax consequences of moving into or out of the UK both before and after reaching long-term resident status.
Conclusion
The upcoming changes to UK inheritance tax represent a major change in how cross-border wealth is treated. With the move to a residence-based system, it is vital to take comprehensive and informed steps to review and, if necessary, revise your estate plan.
At Cutts and Co Accountancy, we are committed to supporting our clients through these changes. If you are concerned about your exposure or the effect this may have on your estate, we recommend speaking with a tax professional. Taking action now will help protect your wealth and provide clarity and security for your beneficiaries.
