IHT and long term residence status - May 8th 2025

Inheritance tax (IHT) liability changed from 6 April 2025 and is now directly linked to a person’s long-term residence status. Although the new rules aren’t generally favourable for wealthy individuals moving to the UK, they do provide certainty for anyone who leaves the UK to live overseas, having lived here all of their life.

It is important to remember that assets situated in the UK will generally be subject to IHT regardless of a person’s long-term residence status.

There is little point in undertaking IHT planning if no, or only a minimal amount of, IHT is going to be payable anyway due to the availability of reliefs and nil-rate bands.

Leaving the UK

Before 6 April 2025, the only way to remove overseas assets from the charge to IHT was to acquire a new domicile. Merely living overseas for a long time was not sufficient because it was necessary to show that a person had severed their ties with the UK. This would have included cutting UK social connections, and making an overseas will and burial arrangements.

• From 6 April 2025, it is simply a matter of being non-resident for the required number of years; known as the IHT tail.
• Between three and ten years of non-residence are required, depending on how long a person has been resident in the UK. However, ten years are necessary for the typical retiree who has always been UK resident.
• Ensuring life assurance is written into trust will shield beneficiaries from the exposure to the potential IHT liability during the IHT tail.

Many retirees who have never acquired a new domicile may now be outside the scope of UK IHT on their overseas assets. If IHT would be payable on UK assets, moving wealth offshore could eliminate this potential liability. Of course, the IHT situation in the country of residence must also be considered.

Returning to the UK

Retirees who need to return to the UK, maybe for family or medical reasons, will also benefit under the new rules.

Previously, someone returning to the UK became subject to IHT on their worldwide assets fairly quickly if they were born in the UK. Now, anyone who has accumulated at least eleven years of non-residence can return to the UK for quite a few years before being caught.

Deeds of variation

Families have the opportunity to carry out post-death IHT planning using a deed of variation regardless of the deceased’s long-term residence status. With a deed of variation, the beneficiaries alter the way in which assets are distributed under the terms of the deceased’s will.

• Care is needed here because a deed of variation cannot be subsequently amended.
• The deed must be made within two years of death.
• For example, if a son or daughter inherits from a parent, they might prefer for the inheritance to go directly to their own children, maybe with the assets held in trust. This will avoid the potential IHT implications of the son or daughter making the gift directly.

If the deceased is not long-term resident in the UK, it might be appropriate to arrange for overseas assets to be held in trust rather than being inherited directly by long-term resident beneficiaries.