In a major change to the current rules, from 6 April 2025, anyone who is not ‘Long-term UK resident’ (LTR) is outside of the UK’s Inheritance Tax (IHT) net, at least for their non-UK situs assets.
For individuals aged 20 or older, LTR status means they must have been UK resident for at least 10 of the previous 20 tax years. However, once an individual ceases to be UK resident, LTR status is also phased out on a sliding scale of between three to 10 years. For example, if the individual was UK resident for 13 of the past 20 tax years before becoming non-UK resident, they will lose their LTR status after three tax years of non-UK residency. If they were UK resident for 16 years, they lose LTR status after 6 tax years of non-UK residency, and so on.
Under the current law, returning Brits who are ‘formerly domiciled resident’ have their worldwide assets exposed to IHT after a grace period of only one tax year – not a very generous ‘welcome home’. Fast forward to 6 April 2025, and it’s a completely different picture for returning Brits who have been abroad for at least 10 consecutive tax years in the previous 19. Their non-UK situated assets are not subject to IHT for 10 years, beginning with the UK tax year of their arrival – a very nice welcome home.
Of course, you don’t have to be a Brit to enjoy this IHT treatment but the contrast between the current rules and the soon to be current rules could not be starker for those born in the UK with a UK domicile of origin in particular.
Accurate records of UK tax years of residency will be critical. Taxpayers may need help from their tax advisers with this.
The change is also a significant win for Brits who intend to stay abroad. Under current rules, individuals living abroad who retain their UK domiciles (actual or deemed) are exposed to IHT on their worldwide estates, regardless of where they are tax resident. It’s hard to lose a UK domicile if you like to move between different countries or intend to return to the UK upon retirement. From 6 April 2025, ex-pats just need to work at staying ‘not LTR’ if they want to keep their non-UK situs outside the clutches of IHT.
For further queries regarding LTR status and IHT, please contact Helena Luckhurst.
