Autumn Budget 2024: Changes to Inheritance Tax from 6 April 2025

From 6 April 2025, the rules for Inheritance Tax (IHT) will undergo a significant change, shifting from a domicile-based system to one based on UK residency. This adjustment will primarily impact long-term residents, who will be liable for IHT on their worldwide estates.

When does IHT apply?

IHT is charged at up to 40% on an individual’s estate upon death, after deducting available nil rate bands and exemptions. The IHT threshold remains at £325,000 until 2030.

Additionally, IHT may apply to:

• Assets transferred into or out of a trust.

• Trust assets at their 10-year anniversary.

Long-Term Residents

From 6 April 2025, an individual will qualify as a long-term resident if they meet one of the following criteria in the relevant tax year:

• UK resident for 10 of the last 20 tax years.

• Under 20 years old and UK resident for at least half of their lifetime.

These rules apply regardless of domicile.

Key Implications

• Long-term residents: Liable for UK IHT on their worldwide assets.

• Non-long-term residents: Only liable for UK IHT on UK-based assets, including interests in UK residential property.

• Spousal elections: Non-long-term resident spouses can elect to be treated as long-term residents for IHT purposes.

The 'Ten-Year Tail'

Under the new rules, individuals who leave the UK will continue to be liable for IHT on their worldwide assets for up to 10 years, based on their UK residency history:

• 10–13 years of residency out of the last 20 tax years: Liability for 3 years post-departure.

• 14–19 years of residency out of the last 20 tax years: Liability for 4–9 years post-departure.

• 20 years of residency out of the last 20 tax years: Full 10-year liability.

Transitional Rules

Special rules apply to individuals who:

• Are non-UK domiciled as of 30 October 2024.

• Become non-UK resident from 2025/26 onwards.

In these cases, the individual will follow existing deemed domicile rules:

• UK resident for 15 of the last 20 tax years, and

• UK resident in at least one of the four years prior to death.

Planning Opportunities

1.Gift of non-UK assets

Gifts of non-UK assets made before long-term residency begins will remain outside IHT, even if the individual later becomes a long-term resident.

2.Excluded Property Trusts

From 30 October 2024, the IHT status of assets held in trusts will depend on the settlor’s long-term residency status at the time of the relevant event.

3.Brits Abroad

The long-term residence test will apply regardless of domicile, benefiting 'Brits Abroad' who might otherwise have faced IHT on worldwide assets under common law domicile rules. UK assets, including interests in UK residential property, will always be liable to IHT.

Pre-5 April 2025 Planning Tips

Non-domiciled individuals expected to qualify as long-term residents from April 2025 should:

• Consider gifting non-UK assets before this date to keep them outside IHT net.

• Review residency periods if planning a return to the UK.

If you have any queries in relation to the changes to Inheritance Tax from 6 April 2025, or need assistance planning for these changes, please get in touch with us.