Inheritance Tax & Domicile

The Budget announcements withdrew taxation on the remittance basis from non-UK domiciled persons, but it presented a change to Inheritance Tax that may be advantageous to many.

Alongside the significant changes to the method of income taxation of non-UK domiciled individuals, the Budget confirmed the plans to move to a residence-based system for Inheritance Tax (IHT) too.

Historically, IHT has been levied on an individual’s estate when they are UK domiciled. Domicile is a common law concept and determined by where an individual considers their home to be. Domicile is based in part on each person’s choices and the facts associated with them, and a large part to do with their thoughts, feelings, and intentions, which can often be difficult to document or prove particularly once they have passed away.

To circumvent this, the Government have confirmed that from 6 April 2025, the extent to which an individual’s worldwide estate is subject to IHT will be based on where they had been living in the years before their death.

From 6 April 2025, once an individual has been UK tax resident for 10 of the last 20 tax years, they will be within the scope of IHT on their worldwide estate.

Key residency rules

It is possible to move outside of the scope of IHT after a consecutive period of non-UK residence. Where UK resident for 10 to 13 years, you must be non-UK resident for 3 years to fall outside of the scope of IHT.

Number of UK resident years	Required number of non-UK resident years to no longer be long term resident
13 or less	3
14	4
15	5
16	6
17	7
18	8
19	9
20	10

Opportunities before April 2025

This means that for UK expats who have been living outside of the UK extensively in retirement, from 6 April 2025 their non-UK estate may fall outside of the scope of IHT. Further, for individuals who were considering retiring abroad, knowing they would limit their IHT exposure after spending time away may be enough to encourage the move.

Please note, these rules do not impact IHT which is levied on UK assets. Regardless of the individual’s residence or domicile status, where an individual owns UK assets, these are within the scope of IHT.

This rule change also presents an opportunity for any individuals who are currently deemed UK domiciled due to being UK resident for 15 of the last 20 tax years. It is possible to reset the clock by leaving the UK in 2024/25, ie before 6 April 2025, in which case their deemed domicile status would fall away after four years of non-UK residence. This is in line with the current rules for non-UK domiciled persons. In contrast, if the individual stays resident, they would be looking at between 6 and 10 years of non-residence required to be outside of the scope of IHT once the new rules are in force.

There are various jurisdictions which hold Inheritance Tax treaties with the UK. The change in rules from domicile to residency do not impact the existing IHT treaties meaning there is possible little change for individuals who are domiciled in India, Pakistan, France, Italy, Republic of Ireland, The Netherlands, South Africa, Sweden, Switzerland, or the USA.

Need guidance?

For further guidance, please do not hesitate to contact our team on 01903 234094. Carpenter Box would be pleased to assist in reviewing what these changes mean for your circumstances.