Changes to IHT from 6 April 2025

Up to 5 April 2025, domicile played a key role in determining inheritance tax (IHT) liability. New rules based around residency apply with effect for transfers made on or after 6 April 2025. In this article, I’ll explain some of the key features of the old and new rules. Links are provided throughout to HMRC guidance.

What is domicile?

In simple terms, domicile is the country or territory (‘country’, for simplicity) where you have your permanent home. Various factors are considered when determining domicile, such as where you have the closest family, personal, social and economic ties. Domicile is a common law concept and is separate from both tax residency and nationality.

There are three types of domicile:

1. A domicile of origin
2. A domicile of dependence
3. A domicile of choice

In addition, a person was deemed to be domiciled in the UK for tax purposes where they satisfied at least one of the three tests at s267(1)(a), Inheritance Tax Act (IHTA) 1984. Members of both the House of Commons (MPs) and the House of Lords are always treated as UK resident and domiciled.

Since 2010, when form DOM1 was withdrawn, it has been almost impossible for an individual to get a ruling on their domicile unless the individual is making a disclosure to HMRC. Enquiries into a person’s domicile status can run into hundreds of questions (as indicated at RDRM23080) and may raise sensitive or distressing family issues that the individual was not previously aware of.

IHT liability up to 5 April 2025

Liability to IHT up to 5 April 2025 depended on the individual’s domicile status and the situs (location) of their assets at the time of an IHT charge (s6, IHTA 1984):

HMRC’s guidance on the situs of assets begins at IHTM27071.

Spouses and civil partners

Generally, spouses or civil partners (‘spouses’ for simplicity) can make transfers of assets to each other free from IHT. The exception to this rule is that the cumulative total of all lifetime and death transfers from a UK domiciled spouse to a non-UK domiciled spouse was only exempt up to the nil rate band (NRB) value of £325,000.

A non-UK domiciled spouse, or their executors, could make an irrevocable election under s267ZA, IHTA 1984 to be treated as UK domiciled, provided the individual had a UK domiciled spouse at any time in the preceding seven years. The election only ceased to have effect after four consecutive tax years of non-residency.

Double tax agreements

The UK has 10 double tax agreements (DTAs) relating to IHT/death duties that are based on a person’s domicile status. Each DTA has a process for the two countries to agree the primary domicile status of a person who is dual domiciled (ie, domiciled in both countries under the countries’ domestic rules). The general effect of these DTAs is that the UK can only charge IHT on the UK-situs assets owned by a non-UK domiciled person. The other country taxes the person’s worldwide assets and gives credit for any UK IHT paid. It is important to read a relevant DTA carefully as there are differences in wording across the agreements.

Four of the older DTAs (France, India, Italy and Pakistan), which date back to the days of estate duty, have clauses that meant that anyone domiciled in those four countries cannot be treated as UK deemed domiciled. This exclusion only applies in relation to IHT charges arising on death and not to lifetime transfers. For the other six DTAs, the individual can be deemed UK domiciled.

Trusts

Under the pre-6 April 2025 rules, overseas assets held in trusts that were set up by a settlor who was non-UK domiciled at the date of settlement, were known as ‘excluded property trusts’. The trust’s domicile was fixed at that of the settlor at the date of settlement. Excluded property trusts were exempt from the IHT 10-year and exit charges, even if the settlor later became UK domiciled or UK deemed domiciled.

From 6 April 2017, direct or indirect holdings of UK residential property interests held in non-UK structures (typically an offshore trust owning an offshore company, which in turn owned UK residential property) became liable to IHT.

IHT liability from 6 April 2025

Domicile is no longer relevant to IHT for transfers from 6 April 2025 onwards, but will remain relevant for certain transfers before that date. Instead, non-UK situs assets will only be liable to IHT if the individual is ‘long-term resident’ (LTR). UK situs assets continue to be liable to IHT.

An individual is LTR if they have been UK resident for at least 10 of any of the 20 tax years immediately preceding the tax year in which an IHT charge arises (ie, on death or a chargeable lifetime transfer). Residency is determined under the statutory residence test (SRT), or under the pre-6 April 2013 rules for periods before the SRT was introduced.

There is a transitional rule for an individual who was non-UK domiciled, or deemed UK domiciled, up to 5 April 2025, but who will be non-UK resident for 2025/26. They will be treated as LTR for any year from 6 April 2025 onwards if:

• they satisfy the previous test of being resident for at least 15 of the 20 tax years preceding the year in which an IHT charge arises; and
• they were UK resident for at least one of the four tax years ending with the relevant tax year.

If the above individual returns to the UK, the new LTR rules will then apply to them.

My previous article on the new foreign income and gains (FIG) regime provides background to the SRT. There is also detailed guidance on the SRT, and on the domicile rules and the remittance basis, in TAXguide 04/18.

It is worth noting that years where split year treatment, or treaty relief as a dual resident, were claimed, will count as a full year of UK residency for this purpose. It is important to keep full details of an individual’s residency history for 20 years and this will be invaluable to executors if this is attached to the individual’s Will or retained by the accountant or solicitor. Executors will need to complete form IHT401a where it is claimed that the deceased was not LTR.

Individuals aged 20 or younger will be LTR if they have been UK resident for at least 50% of the tax years since their birth. HMRC’s guidance on this can be found at IHTM47024.

Spouses and civil partners

The pre-6 April 2025 rules noted above have been replicated in the LTR rules. This means that from 6 April 2025, an LTR can only transfer assets free from IHT, during their lifetime or on death, up to a cumulative total of £325,000, to their spouse who is not LTR.

Under the transitional rules, any elections by a non-UK domiciled spouse to be treated as UK domiciled remain in force and roll over into the new rules. This means that the non-UK domiciled spouse who made the election automatically becomes LTR on 6 April 2025.

From 6 April 2025, a non-LTR spouse who did not previously make an election to be domiciled, can elect to be treated as LTR. Due to the seven-year window for making an election, it is still possible to make an election on or after 6 April 2025 to be deemed domiciled for periods before then.

An election to be deemed UK domiciled that was made before 30 October 2024 ceases to have effect after four consecutive tax years of non-UK residency.

All other elections made on or after 30 October 2024 will only cease to have effect after 10 consecutive tax years of non-UK residency.

Once a person’s election to be deemed domiciled/LTR has lapsed due to a sufficient period of non-UK residency, the LTR tests are applied to them personally.

Double tax agreements

In terms of the effect of the new rules on the DTAs mentioned above, HMRC stated in October 2024 that “there are no changes to the treaties or how these operate” (para 158).

The DTAs have not been amended and continue to refer to a person’s domicile status. HMRC states at IHTM47070 that a person will be treated as UK domiciled for DTA purposes if they are LTR at any time from 6 April 2025 onwards. As before, a person cannot be deemed to be LTR where one of the four oldest DTAs mentioned above applies, but can in the case of the other six.

Spouse elections to be UK deemed domiciled (up to 5 April 2025) or to be deemed LTR (from 6 April 2025) are ignored when considering the terms of a DTA, so the electing spouse’s own LTR status needs to be determined.

Relevant property trusts and IHT

I outlined the concept of an ‘excluded property trust’ earlier. The major change from 6 April 2025 is that a trust’s liability to IHT on its non-UK situs assets is no longer based on the settlor’s domicile status at the time of settlement. Instead, the trust’s position will mirror the long-term residency position of the settlor. So, if the settlor becomes LTR, the trust ceases to be an excluded property trust from the same date, meaning the trust is then liable to UK IHT on its worldwide assets.

A relevant property trust with a settlor who was UK-domiciled up to 5 April 2025 and who is not classed as LTR at any time from 6 April 2025 onwards, is liable to an IHT exit charge at the date the settlor becomes non-LTR. This is because its non-UK situs assets, which were previously liable to IHT, have become excluded property (ie, assets have left the charge to UK IHT).

Conversely, settlements made by a settlor who was non-UK domiciled and who then becomes LTR on or after 6 April 2025 will be liable to IHT 10-year and exit charges from the date the settlor becomes LTR. The 10-year and exit charges are still based on the original date of settlement. There will be a reduction in the number of quarters used in the calculations to reflect the number of quarters that assets were excluded property up to the date of the settlor’s change in status.

There are transitional rules that apply when the settlor has died before an IHT charge arises in a trust:

• If the settlor died before 6 April 2025, non-UK assets in the settlement will continue to be excluded property if the settlor was non-UK domiciled at the date of settlement.
• If the settlor died on or after 6 April 2025, the LTR position of the settlor at their date of death determines the trust’s future position.

Other trusts

Assets held in qualifying interest in possession (QIIP) trusts will only be excluded property if both the settlor and the beneficiary with the QIIP are not classed as LTRs.

Non-UK assets held in a QIIP before 30 October 2024 will not be liable to UK IHT when the QIIP ends, or on the death of the QIIP beneficiary.

New QIIPs made on or after 30 October 2024, or settlements where a new/successive QIIP is created from that date onwards, will be subject to the LTR rules.

Gifts with reservation of benefit (GWR)

Where a person has gifted the ownership of an asset, but continues to use or benefit from it (the reservation of benefit), the asset remains in their estate for IHT purposes. If the reservation of benefit ends during their lifetime, that is a potentially exempt transfer (PET) at the date the reservation ends. If the individual survives seven years from the date of the PET, the PET is not included in their death estate.

Up to 5 April 2025, there was no charge under the GWR rules if the asset was excluded property when the donor died or when the reservation of benefit ended.

The new rules from 6 April 2025 use the donor’s LTR position at death, or at the date the reservation ended to determine whether non-UK assets are chargeable under the GWR rules.

Pre-owned assets tax

The Pre-owned assets tax (POAT) rules will continue to apply to UK residents only. Those who are LTR will pay the charge on their worldwide property that falls within the POAT rules, whereas those who are UK resident but not LTR, will only pay the charge on relevant UK assets.

As I said in my earlier article, the changes effective from April 2025 add confusion to an already complicated area of tax, at least in the short term. Please do remember that, as required by Professional Conduct in Relation to Taxation (PCRT), advisers should ensure they are suitably experienced before advising taxpayers.

Katherine Ford, Technical Manager, ICAEW