In the October 2024 Budget, the UK government announced significant reforms to the UK’s inheritance tax (IHT) regime, particularly affecting non-UK domiciled individuals and the treatment of offshore trusts.  These changes, effective from 6 April 2025, aim to modernise and simplify what is an antiquated, unpredictable and complex status quo.

In the October 2024 Budget, the UK government announced significant reforms to the UK’s inheritance tax (IHT) regime, particularly affecting non-UK domiciled individuals and the treatment of offshore trusts.  These changes, effective from 6 April 2025, aim to modernise and simplify what is an antiquated, unpredictable and complex status quo.

At the time of writing, the legislation is still in draft form and won’t be finalised until the current Finance Bill is on the statute book.  That said, the government has shown sufficient commitment to their plans, and have a large enough majority in the House of Commons, that there is now a high level of confidence that the new regime will substantially match the draft legislation.

As a result, the taxpayers formerly known as “non-doms” – and their advisers, together with trustees of any offshore trusts they may have settled – will need to determine their LTR status, as this will be required for their Self-Assessment tax returns, IHT accounts, and their entitlement to related preferential schemes such as the new 4-year “FIG” regime.

Understanding the New Long-Term Resident Inheritance Tax Regime

Under the new rules, the concept of domicile, a key factor in determining IHT liability, will be replaced by a residence-based test.  Broadly speaking, an individual will be classified as a Long-Term Resident (LTR) if he/she has been UK resident for at least 10 out of the previous 20 tax years.  Once this status is attained, the individual’s worldwide assets become subject to IHT, rather than just those assets situated in the UK.

Key Features of the New Regime:

1. Residence-Based Taxation: The shift from domicile to a residence-based system means that both UK-domiciled and non-domiciled individuals who meet the LTR criteria will be subject to IHT on their global assets after 10 years. Conversely, individuals who fall outside the LTR criteria will only be liable for IHT on their UK assets.
2. An IHT Tail: One of the most crucial aspects of the new regime is the expansion of the “IHT tail.” The new LTR framework maintains an individual’s exposure to IHT for a period even after they cease UK residence.  Specifically, and subject to the transitional provisions described below for certain qualifying individuals, taxpayers who leave the UK after attaining LTR status will continue to be subject to IHT on their worldwide assets for up to 10 tax years following their departure.  The length of the tail is calculated by reference to the number of tax years spent in the UK in the preceding two decades.  This means that even after becoming non-resident for income tax and capital gains tax purposes, an individual can remain within the IHT net, significantly impacting expatriates and those seeking to restructure their affairs upon leaving the UK.  This extended liability raises significant planning considerations.  Individuals intending to leave the UK must factor in the IHT tail when structuring their estate and financial affairs.  Trust planning, asset relocation, and other mitigation strategies will become even more critical to reduce exposure during this period, as in some cases will the jurisdiction they move to: some of those few countries with pre-1975 Estate Duty treaties (especially Italy and India) may have additional attractions in that context.
3. Impact on Trusts: Offshore trusts, particularly those holding non-UK assets, will experience significant – and controversial and problematic changes. If the settlor (the person who establishes the trust) is classified as an LTR (including during his/her “tail” period), the trust’s non-UK assets will no longer qualify as excluded property.  As a matter of UK tax law, at least, this means these assets will be subject to charges to IHT on: (1) every tenth anniversary of the trust’s creation; (2) on capital distributions to beneficiaries; and (3) on the settlor’s LTR tail status ceasing.  The excluded property status of trust assets will now depend on the settlor’s LTR status, causing assets to potentially move in and out of excluded property status as the settlor’s residency status changes.  This means that HMRC will seek to charge foreign taxpayers to IHT on their foreign assets, which raises important questions about both public and private international law issues. Trustees will need to take particularly careful advice on their obligations under UK law, the local law of their ‘home’ jurisdiction, and technical and practical implications arising.  Whilst the UK government hasn’t given any indication that it has considered the point, it does seem conceivable that some trustees – especially those in jurisdictions which are protective of trust companies from international efforts to impose reporting and tax obligations – may wish (or be forced) not to comply with their new UK responsibilities.
4. Transitional Provisions: To ease the transition for some individuals (who would otherwise have had strong human rights grounds to challenge the new law), the government has introduced specific relieving provisions:
   • Leaving the UK before the 2025/26 tax year: Those non-UK domiciled individuals who leave the UK before the 2025/26 tax year will may benefit from the transitional provisions which reduce the maximum IHT tail from 10 to three tax years.  Broadly speaking, those who are deemed domiciles and leave the UK in the 2024/25 tax year will already have an IHT tail of three years, so will be in no worse a position.  Those who left in 2023/24 will have a two-year IHT tail and those who left in 2022/23 a one-year IHT tail.   Those who do not have a deemed domicile and leave the UK before the 2025/26 tax year will have no IHT tail at all.
   • ‘Grandfathering’ Existing Trusts: Assets that were considered excluded property before 30 October 2024 will not be subject to the gift with reservation of benefit (GROB) rules. This ensures that such assets are not included in the settlor’s estate for IHT purposes, even if the settlor retains an interest as a beneficiary.  However, these assets may now fall under the UK’s ‘Relevant Property’ tax regime for trusts, making them liable to the IHT charges mentioned above during the settlor’s LTR status.
   • Death of a Settlor: From 6 April 2025, though a trust’s excluded property status follows the settlor’s LTR status whilst the settlor is alive, on a settlor’s death its status will forever afterwards be fixed based on whatever the settlor’s LTR status was as at his/her death. If a settlor dies before 6 April 2025, the trust’s excluded property status will be determined based on the existing domicile rules at the time the trust was established.  In those cases, it would result in the trust maintaining its excluded property status indefinitely, thereby avoiding the new periodic charges; but in other cases, the continued existence of offshore trusts would carry with it enduring IHT reporting and tax liabilities – irrespective of the residence of the beneficiaries.

Comparison with the Previous Regime

Under the previous IHT system, an individual’s domicile status was pivotal.  Non-UK domiciled individuals were only subject to IHT on their UK assets, while their non-UK assets were classified as excluded property and thus exempt.  Offshore trusts established by non-domiciled individuals could hold non-UK assets as excluded property, shielding them from UK IHT, regardless of the settlor’s length of UK residency.  Once an individual had been resident in the UK for 15 of the last 20 years, they would acquire a ‘deemed’ domicile in the UK for IHT purposes – though that did not affect the excluded property status of assets they had previously put in trust.  That common planning must now come to an end for new arrivers to the UK; the position for existing structures is more nuanced, and much will depend on the needs and circumstances of the settlor and beneficiaries.  In either case, specialised advice will be needed.

The new regime’s emphasis on residency over domicile represents a fundamental shift.  Now, LTRs, irrespective of their original domicile, will face IHT on their worldwide assets after 10 years in the UK – though they can be free of that situation if they spend enough time outside the UK to lose their LTR tail.  Meanwhile, offshore trusts are no longer a guaranteed long-term shelter for non-UK assets, as their tax-exempt status is contingent upon the settlor’s LTR status.

As mentioned above, the new rules will reduce the maximum number of years an individual can be in the UK before their worldwide assets become subject to IHT.   Previously, after 15 years an individual would become a ‘deemed domiciliary’ and their worldwide estate would fall into the scope of IHT.   Now, individuals will only have 10 years before becoming an LTR and the same IHT implications come into play.

Implications for Individuals and Trusts

These reforms carry significant implications:

• Estate Planning: Individuals who anticipate becoming LTRs should reassess their estate plans. Assets previously considered outside the UK IHT net may now be liable, necessitating strategic adjustments to mitigate potential tax liabilities.  They or their advisers will need to calculate and predict with certainty LTR status when it arises and when it is extinguished.
• Offshore Trusts: Trustees and settlors must monitor the settlor’s residency status vigilantly. The dynamic nature of excluded property status means that (as a matter of UK law, at least) non-UK assets will become subject to IHT charges if the settlor attains or loses LTR status.  Regular reviews and potential restructuring of trusts will be required to maintain tax efficiency, and advice on UK and international law implications of this change will be needed in each case.
• Transitional Considerations: Those with existing offshore trusts should explore the available transitional provisions. Understanding the GROB rules and the implications of an IHT tail will be crucial to optimising tax outcomes.  Given the complexity of those rules, detailed advice will be needed.
• Planning for Departure: Given the new IHT tail, which will apply immediately from 6 April 2025, individuals planning to leave the UK should consider pre-departure restructuring strategies as a matter of urgency: many will want to ensure that they are not resident in the UK in the 2025/26 tax year. Settling assets into trust prior to becoming an LTR at least to prevent a 20% IHT entry charge, or even where possible changing the situs of assets, may help to mitigate IHT exposure during the inevitable LTR tail period.

The UK’s shift to a residence-based inheritance tax system marks a significant change in the taxation landscape.  Long-term residents and those utilising offshore trusts will be well advised proactively to engage in comprehensive estate planning to navigate the complexities of the new regime.  Consulting with solicitors who are experienced in advising on UK tax in an international  private wealth context will be essential to ensure compliance and to develop strategies that align with the updated regulations.

Collyer Bristow’s Tax and Estate Planning team has deep experience in advising clients on their domicile status and IHT exposure.   We are also advising our many clients on the new rules and how they can adjust their plans and arrangements accordingly.  We would be delighted to assist you, or your advisors, in navigating the changing landscape.