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From April, domicile will no longer determine which assets are subject to UK IHT. The system is being replaced by ‘long-term residence’. As an expat, is your estate plan ready?
In this guide, our financial advisers at Scottsdale will share some key information about UK inheritance tax (IHT), how it applies to overseas British nationals, and ideas to mitigate a needless tax liability on your estate.
What is UK inheritance tax?
To understand how IHT might apply to a British expat, it helps to see how it usually works for someone living in the UK.
When a British national dies whilst living in the UK, their “estate” will typically be subject to UK inheritance tax (IHT). This is a tax that applies to the value of your possessions – e.g. savings, property and other assets. In the 2024-25 tax year, IHT is typically levied at 40% on the value of an individual’s estate after it exceeds £325,000 in value.
For example, suppose a UK resident dies and owns £500,000 in cash savings. They have no other assets or allowances outside of the nil rate band (NRB). In this case, £325,000 of the estate could be free from IHT. The remaining £175,000 might fall into the “IHT net”, leading to a tax bill of £70,000 (i.e. £175,000 x 40 %).
Do I need to pay IHT if I move abroad?
Some people think that you can avoid UK inheritance tax by relocating overseas. Unfortunately, this is not usually the case. Rather, your treatment under IHT law in the UK depends on one key factor: your long-term residence status.
Until April 2025, the system worked differently. The UK used the concept of “domicile” to decide on the location of your “permanent home” if you lived abroad at the time of death. If a British expat was deemed to have their domicile outside the UK, they would only pay UK IHT on their UK-based assets when they died.
Now, however, the system is changing as of April 2025. The legal concept of domicile is getting replaced with the notion of “long-term residence status” (LTR).
Simply put, if you have been UK tax resident in 10 of the last 20 years, you are considered LTR in the UK. As such, you would be subject to UK IHT on worldwide assets at the time of death.
However, if you do not meet this test, you will only face UK IHT on UK situs assets.
For instance, suppose such an individual dies whilst resident in an EU member state. If they owned a property in the UK, that property would likely be subject to UK IHT. However, any assets in their new home country would be subject to local taxes.
What does the change mean for me?
For British expats, the new rules create some interesting opportunities (as well as challenges, which an adviser can help you address).
In particular, pensions left in the UK could be subject to UK inheritance tax from April 2027 if left in the UK. However, moving pensions outside of the UK could avoid IHT on unused pots if you meet the LTR criteria.
For expats considering moving back to the UK in the coming years, the new LTR rules could also affect your estate and tax plan.
If you return to the UK, the new system will potentially allow you to be an “ordinary resident” there for 10 years before your overseas assets become subject to UK IHT depending on how long you have lived outside of the UK prior to your return
This is in contrast to the outgoing “domicile-based” system, which would lead a repatriating person to immediately reacquire UK domicile status on return.
Relocating assets between the UK and other countries can be a complex and costly process. For instance, transferring a pension overseas using a ROPS (recognised overseas pension scheme) may incur a 25% charge on the total amount you are transferring.
As such, consider discussing your options carefully with a financial adviser before making any big decisions.
Optimising for UK IHT
For British people considering a move abroad and those people seeking to return to the UK, the most sensible approach will be to optimise your assets for UK IHT, ensuring your tax plan (and estate plan) “joins up” with any tax obligations in your new country.
For instance, under UK tax law, an individual can gift up to £3,000 per tax year without the gifts being counted as part of their estate for IHT purposes. This is known as the “annual exemption”, and the £3,000 can be given to one person or split between many.
Another option is to use the “7-year rule” to make gifts above this £3,000 annual exemption. For instance, a British expat who gives away an additional property to a child will not pay UK IHT on the property if they survive the gift by 7 years, and it is not regarded as a “gift with reservation” (GWR). However, if they die within that timeframe, IHT may be due at a tapered rate.
For more ideas and information, please speak with a financial adviser.
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If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.