IHT Planning for Those Approaching or at Deemed Domicile

UK inheritance tax is one of the most significant financial risks for internationally mobile individuals who have spent a substantial portion of their lives in the UK. As individuals approach or reach deemed domicile status, their worldwide estate — not just UK assets — becomes subject to IHT at 40% above the nil-rate band. This guide examines the planning strategies available, in the context of the significant changes to the non-dom and IHT regime introduced in 2025.

The IHT Regime: An Overview

UK inheritance tax is charged at 40% on the value of a deceased person's estate above the nil-rate band (currently £325,000). An additional residence nil-rate band of £175,000 is available in respect of a residential property passed to direct descendants, subject to tapering for larger estates.

For non-UK domiciliaries under the pre-2025 rules, IHT applied only to UK-situated assets — a significant carve-out for those with predominantly non-UK wealth. Under deemed domicile rules (15 of 20 years UK residence), the entire worldwide estate became subject to UK IHT, placing long-term UK residents in the same position as UK domiciliaries of origin.

The 2025 reforms replaced the domicile-based framework with a residence-based system. The details are complex and were still being clarified as of mid-2026; this guide describes the broad principles of planning that remain available while noting that the specific rules require professional advice to apply correctly.

Understanding the Pre-2025 Deemed Domicile Window

Under the pre-2025 regime, the "window" for IHT planning was the period before reaching 15 years of UK residence in the preceding 20 years. Once deemed domicile was reached:

• The worldwide estate became subject to IHT.
• Excluded property trusts already established remained potentially outside the IHT net for trust assets (subject to the trust meeting the excluded property conditions).
• New excluded property trusts settled by a deemed domiciliary did not qualify for excluded property treatment.

The strategic implication was clear: non-doms approaching the 15-year threshold needed to take action before crossing it, not after.

The 2025 reforms changed the relevant test, the thresholds, and transitional provisions. Those already at or past deemed domicile under the old rules, and those approaching deemed domicile under the new rules, need fresh advice on their current position.

Excluded Property Trusts: Still Relevant?

As discussed in the guide on excluded property trusts, EPTs were not abolished by the 2025 reforms. However, the rules governing when they provide IHT protection and what types of assets qualify as excluded property were changed. For those considering establishing a new trust structure, or reviewing an existing one, specialist advice is required.

For those who established an EPT under the old regime before the reforms, the question is whether the structure continues to provide the intended protection under the new rules and transitional provisions. Existing EPT holders should have reviewed their structures with their advisers in 2024–25; if not, this should be a priority.

Potentially Exempt Transfers (PETs)

One of the most broadly applicable IHT planning tools is the potentially exempt transfer. A PET is a direct gift from one individual to another (not into a trust). If the donor survives seven years from the date of the gift, the gift is entirely outside their estate for IHT purposes. If the donor dies within seven years, the gift is brought back into the estate, but taper relief reduces the IHT charge for gifts made between three and seven years before death.

PETs are available regardless of domicile status. For individuals with large estates who wish to reduce the eventual IHT burden, systematic gifting over time — to children, grandchildren, or other beneficiaries — can meaningfully reduce the taxable estate.

Practical considerations:

• Cash gifts are straightforward: the cash leaves your estate on the date of the gift.
• Gifts of assets: transferring non-cash assets (investments, property) may trigger capital gains tax crystallisation for the donor.
• Retaining benefit: if you give away an asset but continue to benefit from it (living in a property you have gifted, for example), the gift-with-reservation-of-benefit rules bring the asset back into your estate regardless of the seven-year rule.
• Record keeping: maintain clear records of all gifts, including dates and values, for your executors.

Normal Expenditure from Income

Gifts that form part of your normal expenditure from income, that do not reduce your standard of living, and that are habitual (regular) are exempt from IHT without any seven-year requirement. This exemption is underused but potentially valuable for those with surplus income above their lifestyle needs.

Requirements:

• The payment must come from income (not capital).
• It must be part of a regular pattern of giving — a single isolated payment is unlikely to qualify.
• After making the payment, the donor must be left with sufficient income to maintain their normal standard of living.

Regular premium payments into a life insurance policy for the benefit of beneficiaries, regular standing order payments to children or grandchildren, or regular contributions to an educational trust can all potentially qualify.

Annual and Small Gift Exemptions

While modest relative to large estates, the IHT annual exemption (£3,000 per tax year, with the ability to carry forward one year's unused allowance) and the small gift exemption (£250 to any number of individuals who have not received other exempt gifts) are worth using as a matter of course.

Gifts into Trust: Chargeable Lifetime Transfers

Gifts into discretionary trusts (as opposed to gifts outright to individuals) are not PETs but are chargeable lifetime transfers (CLTs). The value of the CLT up to the nil-rate band is not immediately chargeable; above the nil-rate band, an entry charge of 20% applies (representing half the full death rate). Every seven years, the clock resets for the nil-rate band.

Offshore Life Assurance in Trust: Funding the IHT Liability

For individuals whose estate cannot be substantially reduced by lifetime planning — perhaps because wealth is concentrated in illiquid assets, or the estate is very large — a whole-of-life insurance policy written in trust can address the IHT liability without requiring the sale of estate assets.

The mechanism:

• A whole-of-life policy is effected on the individual's life (or jointly on spouses' lives on a second-death basis).
• The policy is written in trust from outset, so the proceeds fall outside the estate on death.
• On death, the policy pays a lump sum to the trustees, who use it to pay the IHT liability on behalf of the beneficiaries.
• The beneficiaries inherit the estate without needing to sell assets to fund the tax.

This approach does not reduce the IHT liability itself but provides the liquidity to pay it in an orderly manner. Premiums are paid from post-tax income and are not themselves IHT exempt (unless they qualify as normal expenditure from income), but the overall cost over a lifetime is typically substantially less than the IHT liability they fund.

The Non-Domiciled Spouse Exemption Issue

Following the 6 April 2025 reforms, this exemption is determined by reference to long-term UK residence rather than domicile. Where one spouse is within the UK IHT net and the other is not a long-term UK resident, the unlimited spouse exemption — normally available for transfers between spouses — is restricted to a capped exempt amount (broadly the nil-rate band; the precise limit should be verified with an adviser).

The spouse who is not a long-term UK resident can elect to be treated as within the UK IHT net, which restores the unlimited exemption for assets passing between spouses. However, this election exposes the electing spouse's worldwide estate to UK IHT — a significant potential cost.

This is a technical decision that requires careful modelling of the relative IHT exposures in both scenarios.

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The information in this guide is for general educational purposes only. It does not constitute financial, tax, or legal advice. UK IHT rules, the non-dom regime, and deemed domicile provisions changed significantly in 2025. Rules are complex, depend heavily on individual circumstances, and continue to evolve. You must seek independent professional advice from a qualified specialist before taking any IHT planning action.

How Global Investments Can Help

Global Investments has extensive experience advising high-net-worth internationally mobile clients on IHT planning, both pre-2025 and under the current reformed regime. We work with specialist UK tax counsel and offshore structuring professionals to develop IHT plans that are appropriate to your circumstances, including lifetime gifting strategies, trust planning, and insurance-based solutions. Contact our advisory team to discuss your IHT position.