On 6 April 2025, a major shift in Inheritance Tax (IHT) rules took effect. The long-established common law concept of domicile is no longer the primary test for determining whether an individual’s worldwide assets are subject to IHT.
In its place stands a new statutory “long-term UK residency” test. For financial advisers and tax planners, understanding the implications of this change is essential, especially when advising on trusts or clients planning to leave the UK.
The new long-term residency test
An individual is now deemed a long-term UK resident if they have lived in the UK for at least 10 consecutive years, or for a total of 10 years within the previous 20 years immediately before the tax year in which a chargeable event arises. Importantly, split years count in full, and the new test applies irrespective of previous domicile classification.
While domicile hasn’t disappeared entirely, its relevance is now limited to a few key areas:
- Deaths or lifetime gifts before 6 April 2025
- Circumstances involving double taxation treaties
- Settlements where the charge arose or settlor died before 6 April 2025
- Transitional provisions involving gifts with reservation or qualifying interest in possession (IIP) trusts
Leaving the UK
For individuals classed as long-term UK residents who then leave the country, IHT liability doesn’t end immediately. They remain within scope for a minimum of three years — and potentially up to 10 years — depending on their prior UK residence.
However, once someone has been non-UK resident for 10 consecutive years, they are no longer considered a long-term UK resident for IHT purposes, even if they return later. The clock resets.
Transitional provisions for 2025–26
There are specific rules for individuals who are not domiciled or deemed domiciled in the UK as of 30 October 2024:
- If they become non-UK resident in 2025–26, they will not be treated as long-term UK residents.
- If they are deemed domiciled as of that date and become non-resident in 2025–26, they will remain within the IHT net until the start of their fourth year of non-residence.
Should they return to the UK, the full long-term residency test will apply again.
How trusts are affected
Relevant property trusts: For discretionary trusts and most lifetime IIP trusts created by UK settlors with UK situs assets, the new rules change little.
Excluded property trusts: However, the landscape is different for excluded property or ‘foreign settled property’ trusts — those historically set up by non-domiciled individuals holding non-UK assets.
From 6 April 2025:
- If the settlor is alive, the IHT treatment of charges depends on whether they are a long-term UK resident at the time of the charge.
- If the settlor died on or after 6 April 2025, the same test applies: was the settlor a long-term UK resident immediately before death?
- If the settlor died before 6 April 2025, the old domicile rules apply based on their status when the property entered the trust.
- For qualifying IIP trusts (mostly created on death), excluded property status now depends on both the settlor and beneficiary not being long-term UK residents at the time of the chargeable event.
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Transitional relief for existing trusts
Protection is in place for trusts established before 30 October 2024:
- Excluded property already in settlement on or before that date will not be subject to IHT on death or under the gift with reservation rules, provided it remains offshore at the time of the chargeable event.
- Similarly, excluded property in qualifying IIP settlements before 30 October 2024 avoids certain IHT charges — again, if still situated outside the UK.
However, new additions to existing settlements or newly created trusts from 30 October 2024 onward cannot benefit from this protection. Crucially, adding new property that does not qualify as excluded property will not affect the protected status of original property held as of the cut-off date.
A welcome shift for leavers
For many clients, the practical outcome — whether UK or worldwide assets are in scope — will feel broadly unchanged. But advisers have long wrestled with the “stickiness” of domicile: once acquired, it was difficult to be sure whether it had truly been shed upon leaving the UK.
The introduction of a clear, time-based residence test replaces ambiguity with certainty. Clients planning to leave the UK can now more confidently structure their affairs, knowing exactly how long they must remain non-resident before their non-UK assets fall outside the scope of IHT.
Ultimately, the change may simplify planning for many and bring clarity to a complex area of tax law. But with significant implications for trusts, lifetime gifting and international mobility, expert advice remains essential.
Shaun Moore is a tax and financial planning expert at Quilter
