The UK is moving to having a residence-based regime for inheritance tax starting in April 2025.

In Chancellor Jeremy Hunt’s Budget last week, he announced large-scale reform to tax relief for non-domiciliaries.

In 2023 inheritance tax receipts accounted for just 0.91 percent of all HMRC tax income.

Inheritance tax (IHT) is applied to estates valued at £325,000 or more, with this threshold increasing to £500,000 for direct descendants of the deceased, such as their children.

Since its introduction inheritance tax has not applied to worldwide assets but this may no longer be true after 6 April 2025 and a significant policy consultation.

Inheritance tax changes

After the consultation period has ended it is proposed that inheritance tax will be owed on worldwide assets provided the person has been a resident of the UK for 10 years or more.

The opposite is also true as people that have been non UK residents for 10 or more years will lose liability for IHT.

If a foreign trust has been set up after the cut off date of 6 April 2025 then the trustees could still be taxed if the settlor has been a resident for 10 years or has been a residents in the last 10 years.

The Consultation

As the changes will not come into effect until April 2025 and the potential change of Government may preempt it there are still many aspects of the reform that are subject to adaptation.

This means the consultation will be subject to the whims of whichever party is in control of the Government during the consultation.

The consultation will deal with any connecting factors other than residence, gifts with reservation, the length of the residence criteria and tail provision, transitional provisions, domicile elections, formerly domiciled residents and calculation of trust charges.

This means that inheritance tax changes are still very much up in the air and subject to massive changes following this consultation.

What you need to do

In order to not lose out as a result of these changes it is important to take these proposals into account if planning to move to the UK or looking to set up a trust around the cut off in April 2025.

Law firm Osborne Clarke released a statement on these changes which said: “The big question is to what extent this creates an opportunity for UK domiciliaries to leave the UK IHT net while maintaining a limited presence in the UK.

“In reducing the tax liability on foreign assets to those who fall within objective criteria (day counting), the UK may become exposed to a wealthy exodus (with limited non-taxable presence) for previously lifelong UK taxpayers.

“Depending on the consultation, there may be a helpful decoupling of succession law (based on domicile – intention), from tax law (based on residence – objective day counting). This could enable internationally mobile families to prepare English wills of worldwide assets and opt for domicile of choice (and therefore freedom of testamentary disposition rather than forced heirship) while not suffering the previously automatic liability to worldwide IHT.

“The UK estate tax treaties with other counties may need to be renegotiated given that they are based on domicile. It might be possible to counter this by classifying 10 years’ residence as deemed domicile in the legislation.

“However, Indian and Pakistan domiciliaries have benefited from a double tax treaty anomaly where they, in limited circumstances, cannot be subject to deemed domicile rules. This anomaly must be under threat as part of the current overhaul.”