From 6 April 2025, significant reforms to Inheritance Tax (IHT) and the abolishment of the non-domiciled (non-dom) status will come into effect in the UK. These changes will impact the tax landscape for both UK residents and non-residents, particularly those with foreign assets or complex trust structures. It is crucial for individuals and businesses to prepare for these reforms and assess their tax position in advance.
The New Inheritance Tax Regime
The most notable change to the Inheritance Tax regime is the shift to a residency-based system. Under the current rules, IHT is largely determined by an individual’s domicile status. However, from 6 April 2025, UK residents will be subject to IHT on their worldwide assets after residing in the UK for 10 consecutive years.
The '10-Year Rule' and its Impact
Once an individual meets the 10-year residency threshold, they will remain liable for IHT on their worldwide assets for an additional 10 years, even if they subsequently leave the UK. This ‘10-year tail’ rule creates an extended period of exposure to IHT, significantly impacting expatriates and long-term UK residents with foreign assets.
For UK-domiciled individuals who have been living abroad for more than 10 years, this new test may present an advantage, as their non-UK assets could fall outside the IHT scope earlier than under the current rules.
Changes to Excluded Property Trusts (EPTs)
Another critical aspect of the reforms is the treatment of Excluded Property Trusts (EPTs). Historically, non-UK domiciled individuals could use EPTs to protect their foreign assets from IHT. However, under the new regime, all non-UK assets held in EPTs will become subject to IHT if the settlor has been resident in the UK for more than 10 years. This includes trusts settled by non-doms before the reform date, signalling a significant departure from previous protections.
Abolition of Non-Dom Status
In addition to the IHT reforms, the non-dom status, a long-standing feature of the UK tax system, will be abolished from 6 April 2025. The non-dom regime has allowed individuals whose permanent home is outside the UK to benefit from the remittance basis, exempting their foreign income and gains from UK taxation unless remitted to the UK. This regime has been particularly attractive to high-net-worth individuals with substantial foreign assets.
The New Residence-Based Regime
From 2025, the remittance basis will be replaced by a new residence-based regime. New UK residents will have a four-year grace period during which their foreign income and gains (FIG) will not be subject to UK tax. However, they will lose entitlement to personal allowances and annual Capital Gains Tax exemptions. After this period, individuals will be taxed on their worldwide income and gains, similar to other UK residents.
Only individuals who have been non-resident for at least 10 years will qualify for the four-year FIG regime. For existing non-doms, transitional relief will be available, though less generous than initially proposed by the Conservative government.
Transitional Provisions and Repatriation Facility
The new regime also introduces a Temporary Repatriation Facility (TRF) for former non-doms. This facility will allow foreign income and gains accrued before April 2025 to be brought into the UK with reduced tax liabilities, though the specifics of the rate and duration are yet to be confirmed. The TRF is expected to apply to stockpiled income and gains in offshore structures, providing a window of opportunity for non-doms to repatriate their assets before full taxation kicks in.
Practical Considerations for Trusts and Offshore Structures
The abolition of non-dom status will have a profound impact on trusts and offshore structures. Settlor-interested trusts, previously shielded from UK taxation on foreign income and gains, will be brought into the IHT scope for UK residents who do not qualify for the four-year FIG regime. Income and gains arising within these trusts after April 2025 will be taxed on the settlor on an arising basis, significantly reducing the tax advantages of such structures.
Furthermore, the government is reviewing the Transfer of Assets Abroad (ToAA) provisions, with potential changes to come into effect in 2026. This review could introduce additional compliance requirements for those with offshore structures.
Inheritance Tax and the 10-Year Residency Test
The most substantial change to IHT is the introduction of a 10-year residency test. Once an individual has been resident in the UK for 10 years, all their worldwide assets will be subject to IHT. To exit the IHT net, individuals will need to be non-UK tax residents for a full 10 years. This long-term exposure to IHT creates a significant planning challenge for individuals who plan to relocate abroad but retain assets within the UK.
Key Takeaways
From 6 April 2025, IHT will be based on UK residency rather than domicile status, with a 10-year residency rule applying.
Non-dom status will be abolished, and the remittance basis replaced with a four-year grace period for new residents.
Excluded Property Trusts will be subject to IHT if the settlor has been UK resident for more than 10 years.
Transitional relief and a Temporary Repatriation Facility will be available for current non-doms.
Careful planning and professional advice are essential to navigate these changes and mitigate potential tax liabilities.