Impact Of New Inheritance Tax Rules On Expats
Changes to UK inheritance tax that came in from April 2025 benefit UK expats as the rules change from a domicile-based system to a residence-based system. The new rules mean that British expats will be exempt from UK inheritance tax (IHT) on worldwide assets after living abroad for a certain number of years. UK citizens living abroad for 10 years or more will be exempt from IHT on all assets held outside the UK.
The UK Government has changed the way it determines IHT liability from a domicile to a residence-based system.
Under existing regulation, any individual who is classified as UK domicile is subject to UK IHT on their worldwide assets, including overseas property. Most UK citizens resident in a foreign country remain UK domiciled indefinitely, which under current rules means they remain subject to UK IHT rules.
Domicile of origin is established at birth based on your parents’ domicile and indicates where the jurisdiction to which you are most connected is deemed to be. You may live abroad in different countries during your lifetime but usually your domicile remains the same.
A domicile of choice can be established by moving to a different jurisdiction and forming a permanent or indefinite intention to remain there without any ties to your UK domicile, such as family commitments or holding assets there.
From 6th April, long-term residence in the UK rather than domicile will determine whether you are subject to IHT on your worldwide assets. You qualify as a long-term resident if you have been UK resident for at least 10 out of the previous 20 tax years. For those under 20 years of age, if they have been UK resident for at least 50% of tax years in their lifetime.
UK expats who have been resident outside the UK for 10 years or more will be able to take advantage of the changes straight away and become exempt from IHT on all non-UK assets from 6th April 2025. Expats who are already non-UK resident but for less than 10 years, are expected to no longer be liable after three years abroad after 6th April.
Those who become non-UK resident after April 2025 will remain subject to IHT for between three and ten years, depending on how long they had been UK resident. Anyone who was UK resident for 20 years or more will have to wait 10 years for exemption. If you were UK resident between 10 and 13 years will have to wait three years and for every additional year of UK residence this will rise by one year (up to the maximum of 10 years).
Assets based in the UK will remain subject to UK IHT, regardless of where you are resident. The IHT rate of 40% in the UK can make holding UK assets an unattractive option.
Where British expats are liable to IHT obligations in their country of residence, double tax treaty or unilateral relief application should ensure the estate is not double-taxed.
Tax residence in the UK is determined by the Statutory Residence Test (SRT). The SRT provides a structured framework for deciding whether an individual is resident in the UK for a given tax year, and is thus subject to UK IHT, Income Tax (IT) and Capital Gains Tax (CGT) on worldwide income and gains. There are three tests:-
- Automatic Overseas Tests – If you meet any of these criteria- such as spending fewer than 16 days in the UK in a tax year- you are automatically non-resident.
- Automatic UK Tests – If you satisfy conditions such as having your only home in the UK for more than 90 days (and spending at least 30 days there), you are automatically resident.
- Sufficient Ties Test (STT) – If neither the overseas nor UK tests resolve your status, it is necessary to look at how many “ties” you have to the UK (e.g., family, accommodation, work, time spent in the UK in prior years) and how many days you spend in the UK during the tax year.
If you are internationally mobile, the STT will likely be the most important aspect of the SRT to understand. The STT depends on whether or not someone has been resident in the UK in one of the three tax years prior to the tax year under consideration and distinguishes between those arriving in and leaving the UK. Depending on which category a taxpayer falls into, the number of days, and number of ties permitted before they will be classed as UK tax resident for that year will be different.