UK Inheritance Tax: The Residence-Based Reform Explained

The reforms that took effect on 6 April 2025 represent the most significant overhaul of UK inheritance tax (IHT) since the concept of domicile was embedded in the legislation decades ago. The connecting factor that determines whether a person's worldwide assets are subject to UK IHT — previously domicile — has been replaced by a new concept: long-term UK residence.

For internationally mobile high-net-worth individuals, this change requires a fundamental reassessment of estate planning assumptions. Structures designed to exploit non-domicile status — particularly excluded property trusts settled before April 2025 — face new and in some cases unexpected IHT exposure.

This guide explains the reformed regime, who it affects, how the tail period works on departure, and the controversial transitional treatment of excluded property trusts.

What Changed: From Domicile to Long-Term Residence

Under the old regime, the test for whether a person's worldwide assets were within the scope of UK IHT was domicile. A person with a UK domicile of origin or a UK domicile of choice was a UK domiciliary, and their worldwide estate was subject to UK IHT at 40% (above the nil-rate band threshold). A non-domiciliary was only subject to UK IHT on UK-situs assets — so overseas assets, whether held directly or through certain offshore structures, sat outside the UK IHT net.

From 6 April 2025, domicile has been abolished as the connecting factor for IHT purposes. It is replaced by a test based on how long a person has been UK resident — the long-term resident (LTR) test.

A person is a long-term UK resident if they have been UK tax resident for at least 10 of the last 20 tax years. Once this threshold is crossed, their worldwide assets become subject to UK IHT — in the same way that a UK domiciliary was treated under the old rules.

Who Is a Long-Term UK Resident?

Residence is determined by reference to the UK Statutory Residence Test (SRT) for each tax year. A tax year in which a person is UK resident counts towards the 10-year threshold; a tax year in which they are non-resident does not.

Once the threshold is met, the person becomes an LTR, and their worldwide estate is exposed to UK IHT. This applies regardless of:

• Where they are living at the time of death
• Where their assets are situated
• Whether they have maintained connections with another country throughout their UK residence

The 10-of-20-year test looks back from the current tax year. This means that an individual who has been UK resident for exactly 10 years but leaves the UK remains an LTR during a tail period (discussed below). It also means that an individual who has been in and out of the UK over 20 years — with interruptions — accumulates years towards the threshold on a cumulative basis.

The Tail Period: Leaving the UK After LTR Status

A critical feature of the new regime — and one that catches many departing individuals off guard — is that LTR status does not end the moment a person ceases to be UK resident. There is a tail period during which the person remains within the scope of UK IHT on worldwide assets, even after leaving the UK.

The length of the tail period depends on how many years the person has been UK resident, on a sliding scale from three to ten tax years:

• 10 to 13 years of UK residence: the tail period is 3 tax years from the last year of UK residence. During this period, worldwide assets remain within the UK IHT net.
• 14 to 19 years of UK residence: the tail increases by one year for each additional year of residence (so 14 years of residence gives a 4-year tail, 15 years a 5-year tail, and so on).
• 20 or more years of UK residence: the tail period reaches its maximum of 10 tax years.

In practical terms: an individual who has been UK resident for 20+ years and then emigrates will continue to have their worldwide estate subject to UK IHT for up to a decade after departure. This represents a profound change for long-term UK residents who may have assumed that leaving the UK would quickly remove them from the UK IHT net.

By contrast, under the old domicile rules, a person with a UK domicile of origin or choice needed to acquire a domicile of choice in another country — which required a combination of physical presence, intention to reside permanently or indefinitely abroad, and severance of ties with the UK. The new residence-based test is considerably more mechanical and, in many respects, more severe for individuals who have spent a long time in the UK.

What About UK-Resident Non-Doms Before April 2025?

Individuals who were UK resident but non-domiciled under the old rules occupied a privileged position: regardless of how long they had been UK resident (subject to the 15-of-20-year deemed domicile rule that applied from 2017), their overseas assets were outside UK IHT so long as they remained non-domiciled.

From April 2025, domicile is no longer relevant for IHT. A previously non-domiciled individual who has now been UK resident for 10 or more of the last 20 years is an LTR, and their worldwide assets are within the UK IHT net. This represents a significant retrospective change for long-standing UK residents who had previously structured their affairs on the assumption that non-domicile would protect their overseas estate indefinitely.

Excluded Property Trusts: The New Exposure

Under the old regime, an excluded property trust (EPT) was a highly effective IHT planning tool. A non-UK domiciliary could settle non-UK assets into a trust while they were non-domiciled, and those assets would be excluded property — permanently outside the scope of UK IHT, even if the settlor subsequently acquired UK domicile or UK deemed domicile.

The reform fundamentally changes the EPT landscape. From 6 April 2025:

• New trusts: assets settled by a non-LTR settlor remain excluded property in the trust. However, if the settlor subsequently becomes an LTR, the assets in the trust will be brought within the scope of UK IHT from the moment the settlor crosses the LTR threshold.

• Existing trusts settled before April 2025: the government's original consultation proposed bringing EPT assets within IHT from the date the settlor becomes an LTR, but the transition for pre-existing trusts has been subject to ongoing consultation. The detail of how pre-April 2025 EPTs are treated — particularly regarding the timing of any IHT charge — should be verified against the most current HMRC guidance and legislation, as the rules were still being finalised as of early 2026.

The practical consequence is that individuals who previously settled offshore trusts as EPTs, expecting permanent IHT protection for those assets, now face the prospect of those assets being brought into charge. For some, this represents hundreds of thousands — or millions — of pounds of unexpected IHT exposure.

De-enveloping and Unwinding Old Structures

Given the fundamental change in the IHT treatment of offshore structures, many individuals with pre-existing EPTs are considering whether to:

• Retain the trust but adjust its terms or administration to minimise IHT exposure (e.g. by ensuring distributions are made before the settlor becomes an LTR, or by reviewing whether the trust assets can be restructured)
• Distribute assets from the trust while favourable conditions still exist, though distributions must be carefully timed and structured to avoid income tax and CGT charges on the trustee or beneficiaries
• Review the trust's jurisdiction and governing law in light of the changed UK tax position

Any unwinding or restructuring of an EPT involves complex tax analysis across multiple jurisdictions and should only be undertaken with specialist legal and tax advice. Rushed or poorly structured unwinding can crystallise significant tax charges that would not have arisen had the trust remained in place or been restructured more carefully.

IHT Rates and Thresholds Under the New Regime

The reform does not change the headline IHT rate of 40% on the value of the estate above the nil-rate band (currently £325,000), nor the residence nil-rate band (up to £175,000 for the family home passing to direct descendants). These thresholds have been frozen until at least April 2031, which has the effect of increasing IHT receipts in real terms as asset values rise.

The residence-based reform itself does not abolish the main IHT reliefs — business property relief (BPR), agricultural property relief (APR), and the spousal exemption all continue. Note, however, a separate change: from 6 April 2026, 100% BPR and APR are capped at £2.5m of qualifying assets per estate (the £1m cap originally announced in the October 2024 Budget was raised to £2.5m in December 2025, and the allowance is transferable between spouses or civil partners), with relief at 50% on the value above that threshold (and AIM/unlisted shares attract 50% relief only). Whether the overseas assets of an LTR's estate qualify for BPR or APR will also depend on whether the relevant conditions are met in respect of those assets.

The Spousal Exemption Under the New Regime

Transfers between UK-LTR spouses or civil partners remain fully exempt from IHT. However, the position where one spouse is an LTR and the other is not (a non-LTR) requires careful attention: transfers from an LTR to a non-LTR spouse may be subject to the limited spousal exemption (currently equivalent to one nil-rate band) unless the non-LTR spouse elects to be treated as LTR for IHT purposes. This is broadly similar to the old position for UK-domiciliary to non-domiciliary transfers.

Planning in the New Environment

Despite the significant changes, planning opportunities exist:

• Accumulating non-UK residence years strategically, particularly for individuals approaching the 10-year threshold, can defer LTR status.
• Gifting during the tail period using the annual exemption (£3,000), potentially exempt transfers (PETs), and other lifetime allowances.
• Life insurance policies written in trust can provide funds to meet an IHT liability without requiring the estate's assets to be sold.
• Regular reviewing of asset location — the treatment of different asset classes and situs for IHT purposes remains relevant.
• Will planning and trust deed review — the reform necessitates a comprehensive review of all estate planning documents to ensure they reflect the new rules.

How Global Investments Can Help

The shift from domicile to long-term residence as the IHT connecting factor is one of the most consequential changes to UK private client taxation in a generation. Global Investments works with internationally mobile high-net-worth individuals and families to:

• Assess LTR status and model IHT exposure under the new regime
• Review existing offshore trust structures, including EPTs, against the new rules
• Advise on lifetime gifting strategies, life insurance solutions, and IHT-efficient investment structuring
• Coordinate with specialist UK tax solicitors and barristers to review trust deeds and estate planning documents
• Support non-LTR spouses in evaluating the election for LTR treatment and its consequences

The rules introduced from April 2025 continue to evolve, and further legislative and guidance changes are expected. This guide is accurate as of the date of publication but should not be relied upon as legal or tax advice. Always seek qualified professional advice tailored to your circumstances. Tax treatment depends on individual circumstances and may change in future. Investments can fall as well as rise.

Contact Global Investments to discuss the impact of the IHT reform on your estate and to explore planning options.