Major changes to Inheritance Tax from April – How new residence rules and the end of non-dom status could affect your estate

Major reforms to the UK’s Inheritance Tax (IHT) regime are on the horizon, with sweeping changes, particularly affecting non-domiciled individuals (non-doms) set to take effect from 6 April 2025.

At the heart of these reforms is a move away from the current domicile-based framework to a residence-based system.

The implications extend well beyond IHT, with the long-standing remittance basis of taxation also being abolished and replaced by a four-year Foreign Income and Gains (FIG) regime.

For many people, particularly non-UK domiciled people residing in the UK, this could affect their estate planning and succession strategies.

Moving from domicile to residence

Currently, an individual’s exposure to IHT on non-UK assets hinges on whether they are UK domiciled, or deemed domiciled, under specific rules.

From April 2025, this will change. The concept of domicile will no longer determine the liability for IHT on non-UK assets.

Instead, the focus will shift to an individual’s long-term residence status.

An individual will be classified as a long-term resident once they have spent 10 out of the previous 20 tax years resident in the UK.

This is assessed using the same statutory residence test currently applied for Income Tax and Capital Gains Tax (CGT) purposes.

Once someone meets this threshold, all their worldwide assets (including non-UK assets) will be subject to IHT, effective from the start of their eleventh year of UK residence.

The Inheritance Tax ‘tail’

A notable addition to the new rules is the so-called Inheritance Tax tail.

Even after an individual ceases UK residence, their worldwide estate won’t immediately fall outside the UK’s IHT net.

Instead, there will be a ‘tail’ period of continued IHT exposure, lasting between three and ten years, depending on the length of their previous UK residence.

For instance, those resident in the UK for 10 to 13 years will face a three-year tail. For each additional year of residence beyond this, the tail extends by one year, up to a maximum of 10 years.

However, there is some relief for non-UK domiciled individuals who exit the UK before the changes take effect.

Transitional rules mean that those non-resident during the 2025/26 tax year, and able to demonstrate a non-UK domicile status as of 30 October 2024, will retain a fixed three-year tail, regardless of how long they were a UK resident prior to leaving.

Trusts under scrutiny

Trusts have long been a favoured tool for non-UK domiciled individuals to safeguard non-UK assets from IHT.

However, the reforms alter the treatment of trusts from April 2025.

Going forward, the excluded property status of non-UK assets settled into trust will depend on the settlor’s residence status.

If the settlor is a long-term UK resident when a chargeable event (such as a 10-year anniversary or capital distribution) arises, those non-UK assets will fall within the IHT net.

While trusts settled before 30 October 2024 will benefit from certain transitional protections (shielded from the gift with reservation of benefit rules), they will still be subject to ongoing relevant property charges of up to six per cent.

Additionally, if a settlor becomes non-resident and loses their long-term resident status, an exit charge may apply to assets reverting to excluded property status.

The end of the remittance basis and the rise of the FIG regime

A key element of the reform is the abolition of the remittance basis, a feature of the UK tax system for over 200 years.

From 6 April 2025, it will be replaced by the Foreign Income and Gains (FIG) regime.

This new regime:

• Applies to individuals during their first four years of UK residence, provided they have been non-resident for the preceding ten years.
• Offers a full exemption from UK tax on foreign income and gains during that four-year period.
• Requires a claim via self-assessment, with specific reporting obligations. Claimants will forfeit personal allowances and foreign loss reliefs for that year.

Importantly, unlike the remittance basis, the FIG regime is available to UK-domiciled individuals, provided they meet the non-residence criteria.

Trust income and gains under the new rules

From April 2025, protected trust status will be abolished:

• All income and gains within settlor-interested trusts will become taxable on UK resident settlors unless they qualify for the FIG regime.
• Trust income and gains arising before 6 April 2025 will continue to be taxable if matched to worldwide distributions post-2025.

Temporary Repatriation Facility (TRF)

To ease the transition, a Temporary Repatriation Facility will be introduced. This allows non-doms to bring foreign income and gains to the UK at a reduced tax rate:

• 12 per cent tax rate for elections made between 6 April 2025 and 5 April 2027
• 15 per cent rate from 6 April 2027 to 5 April 2028

Funds designated under the TRF can be brought into the UK without further tax charges.

This can apply to both cash and non-liquid assets and even to trust beneficiaries with matched distributions.

If you are affected by these reforms, you must focus on:

• Understanding the new rules and obligations
• Taking advantage of available transitional reliefs
• Ensuring that tax planning and reporting are fully in line with the residence-based system

If you would like advice on how these reforms may affect you, please get in touch with our Inheritance Tax specialists today.

Kathryn Akers