What is Inheritance Tax?
Inheritance Tax (IHT) is a tax levied on the estate of a deceased person. This includes all property, money, and possessions they owned at the time of death. The amount of tax due depends on the total value of the estate and any exemptions or reliefs available.
The standard IHT threshold, known as the nil-rate band, is currently £325,000 per individual. If the estate’s value exceeds this amount, the excess is taxed at a flat rate of 40%. This threshold has remained unchanged for several years and is currently frozen until at least April 2028.
The UK’s IHT regime is known for being both complex and relatively high in comparison to other countries. Therefore, it’s critical that individuals, especially expatriates and international families, understand how these rules apply to them, and how proactive planning can help to reduce or eliminate IHT exposure.
Domicile vs. Residency
Until 5th April 2025, IHT liability in the UK was primarily based on a person’s domicile status. Domicile is a long-standing common law concept that refers to the country a person treats as their permanent home or has a substantial connection to. Even if you live abroad for many years, you could still be considered UK domiciled under the common law test.
To address the complexity and inconsistency of using domicile to determine IHT exposure, the UK shifted to a residence-based system from 6th April 2025. This marks a significant departure from historical precedent and reflects the broader trend in UK tax policy toward defining liabilities through objective, statutory tests.
Key Reforms Effective from April 2025
- Worldwide IHT Exposure for Long-Term Residents: Individuals who have been UK tax resident for 10 out of the last 20 tax years will be deemed “long-term residents” and will be subject to IHT on their global assets.
- IHT Tail Period After Departure: If a long-term resident leaves the UK, they remain within the IHT net for up to 10 years after departure. The length of this tail depends on how long the person was resident in the UK.
- Exemption for Long-Term Non-Residents: Individuals who have been non-resident for 10 consecutive years will only be subject to UK IHT on their UK-situs assets.
This move introduces both planning opportunities and risks, particularly for individuals who have built wealth overseas or who plan to move in or out of the UK.
Types of Assets and Their IHT Treatment
UK-Situs Assets
These include:
- UK property (residential or commercial)
- Shares in UK-incorporated companies
- UK bank accounts (excluding foreign currency accounts held offshore)
- Physical assets located in the UK (e.g. art, antiques, jewellery)
UK-situs assets are always within the scope of IHT, regardless of the individual’s domicile or residency status. There is no exception available for non-residents or non-domiciled individuals concerning these assets, however there is still the nil-rate band available.
Non-UK Assets
Foreign assets may include:
- Overseas property and investments
- Non-UK company shares
- Offshore bank accounts
- Non-UK pensions or savings schemes
These assets will be subject to UK IHT only if the individual is classified as a long-term resident or remains within the 10-year tail period following UK departure.
Excluded Property
The concept of “excluded property” allows certain foreign assets to fall outside the IHT net such as Trusts. Under the post-2025 rules:
- Non-UK assets owned by individuals who are not long-term residents at the time of death or gift are generally excluded from IHT.
- Foreign assets held in excluded property trusts (established before becoming a long-term resident) may remain outside the IHT net. However, the government has indicated that this area is under review and subject to future changes.
Spousal Transfers
If you are married, you can benefit from the unlimited interspousal transfer exemption. This means if either of you were to pass away, the entire estate can be passed to the surviving partner free from IHT (which is payable on second death).
Under the previous domicile regime, if one partner was not UK domicile their exemption was limited to £325,000 which could trigger immediate IHT and create complexities.
Since 6th April 2025 the unlimited exemption now depends on both spouses being Long-Term UK Residents (LTRs). If one spouse is an LTR and the other is not then transfers from the LTR spouse to the Non-LTR spouse are limited to £325,000 (the Nil-Rate Band) cumulatively across lifetime gifts and death transfers.
Residency Classifications
Understanding your residency status is fundamental for determining IHT exposure.:
- Long-Term Resident: UK resident for 10 of the past 20 tax years. Subject to IHT on global assets.
- Recent Leaver (Within IHT Tail): Former long-term resident who left the UK but remains within the tail period. Still exposed to IHT on worldwide assets.
- New/Inbound Resident: Planning to move to the UK or recently arrived. Has the opportunity to plan proactively before reaching long-term residency status.
For Long-Term Residents
Creating or updating a tax-efficient Will is the cornerstone of any UK IHT plan. It ensures that your assets are distributed according to your wishes and in the most tax-efficient way possible. A carefully drafted Will can help reduce IHT liabilities, especially when coordinated with other planning measures.
Joint ownership and asset structuring between spouses can also significantly reduce potential IHT exposure. By balancing the ownership of assets, couples can ensure they make full use of both the standard nil-rate band and the residence nil-rate band, effectively doubling their tax-free allowances where applicable.
Lifetime gifting is another essential strategy. Gifts made to individuals, known as Potentially Exempt Transfers (PETs), can become fully exempt from IHT if the donor survives for seven years. Chargeable Lifetime Transfers (CLTs), often made to trusts, can reduce the value of the taxable estate but may carry an immediate tax charge if they exceed the nil-rate threshold.
Lastly, life insurance can provide much-needed liquidity to pay any IHT due on death. When written in trust, the policy proceeds fall outside the estate. They can be accessed quickly by beneficiaries to cover any tax liability, thereby preventing the forced sale of estate assets and ensuring a smoother transition of wealth.
Exemptions and Allowances
Married couples and civil partners can combine their allowances, resulting in a potential joint nil-rate band of £650,000. Additionally, a further relief, the Residence Nil Rate Band (RNRB), may be available if the deceased owned a primary residence and it is passed to direct descendants. As of 2025, the RNRB stands at £175,000 per person, enabling a couple to leave up to £1 million tax-free potentially.
- Annual Exemption: £3,000 per person, plus one year of unused carry-forward.
- Small Gifts Exemption: Up to £250 per person per year.
- Marriage Gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from others.
- Charity Donations: Entirely IHT-exempt. Also reduces the IHT rate from 40% to 36% if 10% of the net estate is left to charity.
- Normal Expenditure Out of Income: Regular gifts made from surplus income may be exempt if properly documented.
Residence Nil-Rate Band (RNRB)
The RNRB of £175,000 can be claimed if:
- The deceased leaves their home to a direct descendant
- The property was the deceased’s residence at some point
- The estate is worth less than £2.35 million (after which the relief tapers)
PETs and CLTs
- PETs: Transfers to individuals. Fully exempt after 7 years. Taper relief applies after 3 years.
- CLTs: Gifts to trusts or companies. Taxed at 20% immediately if above the nil-rate band, with additional IHT if the donor dies within 7 years.
Trust Planning
Trusts established before becoming a long-term resident may shelter foreign assets. But Trusts are subject to periodic and exit charges every 10 years and on distributions. There are new rules that mean greater scrutiny and reduced effectiveness of trusts post-2025.
Pension Planning
Pensions are due to fall into the inheritance tax calculation in 2027. Planning when pensions will be spent should form part of the overall financial plan. Also, ensure death benefit nominations are up to date.
For New/Inbound Resident: Planning Before Moving to the UK
Pre-Arrival Planning
For individuals planning to move to the UK, careful pre-arrival planning can significantly reduce future inheritance tax exposure. Before becoming a UK tax resident, it may be advantageous to gift assets to intended heirs or transfer them into appropriately structured trusts, particularly where such gifts could fall outside the UK IHT net. Undertaking an audit of your global assets and estimating your expected period of UK residency is a crucial first step.
The new Foreign Income and Gains (FIG) regime, which offers four years of income tax relief for qualifying new residents, may influence your preferred timeline and decision-making.
Projecting your likely duration in the UK will also help determine whether you may become a long-term resident under the 10-out-of-20-year test, and thus subject to UK IHT on your worldwide estate. It is often helpful to prepare forward-looking IHT calculations to anticipate potential exposure. In addition, having separate Wills for your UK and non-UK assets can ensure that estate administration aligns with the relevant succession laws in each jurisdiction and provides clarity for your heirs.
Spouse Status
If you are married, you can benefit from the unlimited interspousal transfer exemption. This means if either of you were to pass away, the entire estate can be passed to the surviving partner free from IHT (which is payable on second death).
Since 6th of April 2025 the unlimited exemption now depends on both spouses being Long-Term UK Residents (LTRs). If one spouse is an LTR and the other is not then transfers from the LTR spouse to the Non-LTR spouse are limited to £325,000 (the Nil-Rate Band) cumulatively across lifetime gifts and death transfers.
For Leavers: Planning After Leaving the UK
Exit Charge
Even after an individual leaves the UK, they remain subject to IHT on worldwide assets for 3 to 10 years, depending on how long they had been UK-resident previously. This is sometimes referred to as a “tail period”.
Asset Migration: Move UK assets offshore (where appropriate and legally compliant). UK bank accounts can be moved to offshore jurisdictions. Pensions can be started to be withdrawn at the right age or moved to an overseas jurisdiction.
Trusts: Structures can be set up after acquiring overseas residency , as the UK IHT will not apply to initial, periodic, and exit charges if the settler is a non-resident and remains so. Trusts have excellent estate planning opportunities.
UK Transitional Relief
If you’ve left the UK on or after 6th April, or are planning to do so soon, you may benefit from transitional relief, but only if you meet certain conditions:
- You must pass the Statutory Residence Test. This confirms you’re genuinely non-resident. Without passing this test, transitional benefits don’t apply.
- You must not be UK domiciled under common law as of 30th October, 2024. Even if you’re a non-dom for tax purposes, everyday law domicile matters. You won’t qualify for relief if you’re UK domiciled under common law; your foreign assets may remain taxable.
You’re a trust settlor If you’ve set up a trust, once your IHT tail ends (after 3–10 years), your foreign assets in that trust may become excluded from IHT.
Spousal Status
If you are married, you can benefit from the unlimited interspousal transfer exemption. This means if either of you were to pass away, the entire estate can be passed to the surviving partner free from IHT (which is payable on second death).
Since 6th April 2025 the unlimited exemption now depends on both spouses being Long-Term UK Residents (LTRs). If one spouse is an LTR and the other is not then transfers from the LTR spouse to the Non-LTR spouse are limited to £325,000 (the Nil-Rate Band) cumulatively across lifetime gifts and death transfers.
Summary
The UK’s move to a residence-based IHT regime from April 2025 represents a paradigm shift for international individuals. Residency, rather than domicile, will drive tax exposure, making it vital to understand your position and plan accordingly. With proactive estate planning, careful structuring of foreign assets, effective use of exemptions, and expert cross-border advice, it is possible to manage and significantly reduce your exposure to UK IHT.
However, there are common pitfalls that must be avoided, such as failing to revise your Will post-reform, holding life insurance policies personally instead of in trust, overlooking global assets in your IHT planning, and assuming that trusts offer complete protection, especially under increased scrutiny post-2025.
Additionally, from an administrative perspective, Inheritance Tax is due within six months from the end of the month of death, with personal representatives responsible for calculating, reporting, and paying the tax. Installment options are available for illiquid assets, such as property or business interests, although interest may be applied to late payments or deferred amounts.
Inheritance Tax is not just a matter of compliance; it’s a matter of legacy. Ensure your wealth passes to your intended beneficiaries by acting now.
Complete financial planning during this phase takes a holistic view of your wealth and long-term objectives. It involves conducting a comprehensive audit of your global assets, reviewing how and where they are held, and projecting your anticipated time in the UK to assess if and when you might fall into the long-term resident category.
With that information, you can model different scenarios to optimise your position and identify opportunities to reduce or eliminate unnecessary tax burdens. This includes identifying assets suitable for gifting or trust placement, evaluating whether restructuring ownership could be advantageous, and planning when and how to draw on various accounts or investments. A proactive approach enables greater flexibility, better resource utilization, and ultimately, greater preservation of family wealth.
DISCLOSURES
LEO Wealth does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
