Non-domicile Inheritance Tax reforms

Inheritance Tax Overhaul: What You Need to Know

The Autumn Budget of 2024 brought with it a wave of tax reforms, as the new Chancellor, Rachel Reeves, set about dismantling the old order with the efficiency of a civil servant clearing their inbox before a long weekend. Among the most significant changes was the scrapping of the current inheritance tax (IHT) rules for UK-resident, non-UK domiciled individuals (non-doms)- a move that will see long-standing tax principles turned on their heads.

If you’ve been relying on the comforting ambiguity of domicile-based tax rules, it’s time to sit up. The new regime is here, and it’s all about where you actually live, not where you claim to be spiritually connected through an ancient lineage and a holiday home in Monaco.

What were the old rules?

Until now, IHT liability depended largely on domicile status:

  • If you were UK-domiciled, your worldwide assets were subject to IHT.
  • If you were non-UK domiciled, only UK situs assets (and certain UK property interests) were within the IHT net.
  • If you had been UK tax resident for 15 out of the previous 20 years, you were treated as deemed domiciled and faced IHT on your worldwide assets.

The New Rules (Effective 6 April 2025)

From 6 April 2025, the government is moving IHT from a domicile-based regime to a residence-based regime (clauses 44 to 46 and Schedule 13, Finance Bill 2025).

Residence-Based IHT Test

From 6 April 2025, IHT will be determined solely on the basis of UK tax residence:

  • If you have been UK tax resident for 10 out of the last 20 years, you will be considered a long-term resident and liable for IHT on your worldwide assets.
  • If you’re under 20, you become a long-term resident if you have spent at least 50% of your life in the UK.
  • Domicile status will no longer be relevant.
  • The Statutory Residence Test will determine an individual’s residency, even if they claim treaty residency elsewhere- a clear sign that HMRC has grown tired of the “but I pay tax in Portugal” excuse.

The “IHT Tail” for Departing Residents

The Government, ever reluctant to wave goodbye to a taxpaying citizen without some parting gifts, has introduced an exit tax rule- a so-called “tail” period for former UK tax residents. The period for which you remain within the IHT net after leaving is as follows:

  • 3 years if you were UK tax resident for 10-13 years.
  • Increasing incrementally up to 10 years if you were UK tax resident for 14-19 years.
  • A full 10 years if you had been resident in the UK for 20 years or more.

Transitional Rules: an Opportunity

For individuals who are not UK tax resident in 2025-26 and were not domiciled in the UK as of 30 October 2024 (for this purpose, deemed UK domicile or elected UK domicile are ignored), transitional rules apply:

  • If you were not deemed domiciled on 6 April 2025 (i.e., not UK-resident for 15 out of 20 years), you will not have an IHT tail.
  • If you were deemed domiciled on 6 April 2025, you will be subject to the current 3-year IHT tail, regardless of the number of tax years you had been UK tax resident for prior to leaving. This will therefore apply to those deemed doms whose last day of tax residence in the UK was between 6 April 2022 and 5 April 2025.

The translation: if you’re planning an exit, act before 6 April 2025, or risk being caught under the new regime for up to 10 more years.

Other Key IHT Changes

Excluded Property: A Narrowing Definition

  • Non-UK assets have historically been excluded property (outside the IHT net) for non-doms.
  • From 6 April 2025, excluded property rules will only apply to individuals who are not long-term residents.
  • Assets such as national savings bonds and premium savings certificates—previously IHT-free for Channel Islands & Isle of Man domiciles—will no longer be exempt.

Lifetime Gifts & Settlements

  • Where an individual makes a lifetime gift to another individual, they should only be within the scope of IHT if they die within seven years of the gift.
  • From 6 April 2025, where an individual is not a long-term resident at the date of a non-UK gift, the gift will remain outside the scope of IHT, even if they die within seven years at a time when they are a long-term resident.
  • Similarly, gifts made by long-term residents will be within the scope of IHT, even if they cease to meet the criteria by the date of their death.
  • If an individual reserves a benefit in a non-UK asset gift, it will still be subject to IHT if they are a long-term resident at death.

Spousal Exemption: A Longer Commitment

  • Currently, a UK-domiciled spouse can pass assets to a non-UK domiciled spouse IHT-free only up to £325,000, unless the recipient elects to be UK domiciled.
  • From 6 April 2025, a non-long-term resident spouse can elect to be treated as a long-term resident for IHT, but this status now lasts 10 years instead of 4 years post-exit.
  • Therefore, an even greater amount of care and consideration will need to be taken before a decision to make such an election is made.

Double Tax Treaties: Still Standing (For Now)

  • The UK’s 10 IH Double Tax Treaties remain unchanged.
  • However, since these treaties refer to “domicile”, HMRC is expected to clarify whether “long-term resident” now serves as an equivalent concept.

Other IHT Reforms: Business & Agriculture

  • Changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) were also announced, tightening the rules on what qualifies for IHT exemptions.
  • From April 2027, unused pension funds and death benefits will be subject to IHT, marking a departure from the current IHT-free status of such assets.

What does this mean for you?

This is one of the most radical overhauls to UK taxation in recent history. The abolition of the non-dom regime and shift to a purely residence-based system will have significant implications for both long-term UK residents and those with international tax exposure.

If you’re currently UK resident and considering an exit, you have until 6 April 2025 to act.
If you’ve left already (or will leave before April 2025), you may escape the new rules entirely- provided you meet the transitional criteria.

How we can help

At Mouktaris & Co, we provide specialist tax advice for non-doms, expatriates, and internationally mobile individuals. If you require further details or tax planning advice, please do not hesitate to contact us.

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