Domicile Residence

A move from domicile to residence – new UK IHT rules for non-doms

The scope of inheritance tax (IHT) in the UK is fundamentally changing from a domicile-based system to a system based on residence.

The current rules – a domiciled based tax

The extent to which an individual is subject to UK IHT taxation depends on whether they are deemed to be domiciled in the UK.
It is possible for a person to be deemed domiciled in the UK for IHT purposes, regardless of their actual domicile status.

The three year rule- A person who loses their UK domicile will be subject to IHT for approximately three years after they cease having a UK domicile.

Long term UK resident rule- A person is treated as UK domiciled for IHT purposes if you are a resident in the UK for 15 out of the previous 20 tax years. For this purpose, that includes any years as a minor and any split tax years when becoming or ceasing to be UK resident.

If you are UK domiciled, IHT is payable on your worldwide estate. If you are non-domiciled, IHT is only payable on your UK- situs assets.

In relation to trusts with a non-domiciled settlor, overseas assets added to the trust before the settlor becomes deemed domiciled are outside the scope of IHT.

Typically assets that pass between two UK domiciled spouses or two non-UK domiciled spouses are IHT free. Assets passed from a UK domiciled individual to a non-UK domiciled individual are subject to IHT. Therefore, for married couples, it is important to consider the domicile of both spouses at any given time.

The new look – a residence based tax

From 6 April 2025, the test for whether non-UK assets owned by individuals and trustees are within the scope of IHT will be whether the individual, or very broadly for trusts the individual settlor of the trust, is a ‘long-term resident’. The changes will not affect the taxation of UK situs assets, which will remain within the scope of IHT, regardless of the individual’s residence status.

Long term UK resident- an individual who has been resident in the UK for 10 out of the previous 20 tax years

Once you are long-term UK resident, your worldwide assets will be subject to IHT.

Individuals who have left the UK and become non-UK resident- an individual will remain within the scope of UK IHT for 10 years once they become non-UK resident, if they have been resident in the UK for 20 years or more.

For those who have only been UK resident for between 10 and 13 years, are subject to IHT for three years. This then increases by one year for every year of residence until it hits the maximum of 10 at 20 years.

The existing domicile election rules will be amended so that the spouse of a long-term resident can elect to be treated as though they were also long-term resident.

Takeaway

The new regime should bring certainty as UK residence is fact based compared to the complex concept of domicile.

For UK nationals living overseas, their non-UK assets will fall outside the scope of UK IHT once they have been non-UK resident for 10 tax years. While new arrivers can live in the UK for up to ten years before their overseas assets come within the IHT net.

It is important to review future plans to identify the amounts of IHT at stake.

Private Client Solicitors are able to consider your personal position and work with your trusted advisors to advise of your current IHT liability in England and report to you with suggestions to mitigate the position and address any legal issues required to achieve your objectives.

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