IHT moves to a residency-based test

Do we finally have more certainty?

The long-term residency test came into force on 6^th April 2025 moving away from a long-established common-law principle of domicile for assessing whether someone’s worldwide assets are in scope for Inheritance Tax (IHT). This article looks to summarise the new rules and consider whether they will bring more certainty of the tax treatment applicable to them, particularly for those leaving the UK.

The new rules utilise the statutory residency test in place for other taxes

From 6 April 2025, an individual is a long-term UK resident if they have been resident in the UK for either:

• the previous 10 years consecutive years
• a total of 10 years or more within the previous 20 years

immediately preceding the tax year in which the chargeable event arises. This is irrespective of any previous classification of origin which might of applied. For example, someone who has a domicile of origin in the UK is now subject to this residency-based test from 6^th April 2025.

Such events include death and making chargeable lifetime gifts. Where an individual has split year treatment under the statutory residence test, this will count as a full year of UK residence for IHT purposes.

Domicile still exists

Domicile (of origin, choice and deemed) as a concept will remain relevant in a few instances though:  

• for deaths and lifetime gifts prior to 6 April 2025;  
• where the common law concept of domicile arises for example within Double Taxation Conventions; 
• for property comprised in a settlement, domicile will remain relevant:
  • for charges which arise before 6 April 2025,
  • where the settlor died before 6 April 2025, or
  • where transitional provision for gifts with reservation of benefit or qualifying interest in possession charges apply.

The new long-term residence test for IHT will apply regardless of an individuals common law domicile.

A ‘Young person’ will have an adapted rule

For someone under 20 (a ‘young person’) the long-term UK residence test is adjusted so that they will be a long-term UK resident where they’re resident in the UK for Income Tax purposes for at least 50% of the tax years since their birth (rounded up to the next whole number). For the purposes of this calculation it is necessary to count the number of whole tax years for which they’ve been alive before the current tax year. 

A young person is not a long-term UK resident at any time in a tax year if they were under the age of 1 (or were not yet born) immediately before the tax year.  

Spouse or civil partner exemption

As was the case under the domicile rules, a UK domiciled spouse can continue to make unlimited exempt transfers to their UK long-term resident partner.

However, the amount they can transfer to a non-UK long term resident spouse continues to be limited. The exemption for transfers between spouses and civil partners is restricted to the nil-rate band that applies at the date of transfer.  The limit is applied to the cumulative total of all transfers to a spouse or civil partner.

This limit does not apply if the transferor is not a long-term UK resident, but the spouse or civil partner is a long-term UK resident. Again, this is the same as what applied pre-2025.

In the same way as a non-domiciled spouse could elect to be treated as a domicile, one can elect to be treated as a long-term resident under the new rules. It is still possible to make a domicile election on or after 6 April 2025 which will take effect in relation to a period before that date.

Leaving the UK

Where an individual is a long-term UK resident and becomes non-UK resident, they will remain in scope for IHT for a minimum of 3 years and a maximum of 10 years depending on the amount of time they resided in the UK. This is detailed in the table below:

So, if a person was UK resident for 15 out of 20 tax years on leaving the UK, they would remain in scope for 5 tax years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for 7 tax years.

An individual will not be treated as long-term UK resident for Inheritance Tax purposes in the year following 10 consecutive years of non-residence, even if they return to the UK; the test is effectively reset  

Specific long-term UK residence test transitional provisions

There are transitional provisions for non-domiciled or deemed domiciled individuals who are non-UK resident in 2025-26 – the year of the new rules. These are:

• An individual who is not domiciled or deemed domiciled in the UK on 30 October 2024 and becomes non-resident in 2025-26 will not be a long-term UK resident
• An individual who is deemed domiciled in the UK on 30 October 2024 who becomes non-resident in 2025-26 will be a long-term UK resident until the start of their fourth year of non-residence  

If they return to the UK the usual long-term UK residence test will apply as described above.

How the new rules impact trusts

Relevant Property Trusts (discretionary trusts and most lifetime interest in possession (IIP) trusts) created by UK settlors with UK property will see no impact. These trusts will continue to be assessed for periodic and exit charges in line with the previous domicile regime.

Excluded property or ‘foreign settled property’ trusts will see some key changes. Previously, where non-UK situs assets were transferred into trust by a non-domicile settlor, these trusts benefitted from being excluded property throughout the term (subject to certain changes/additions). Under the new rules there are some notable changes:

• Where the settlor is alive, charges on foreign settled property which arise on or after 6 April 2025 will depend upon whether the settlor is a long-term UK resident at the time of the charge
• Where a settlor died on or after 6 April 2025, charges on foreign settled property which arise on or after 6 April 2025 will depend upon whether the settlor was a long-term UK resident immediately before their death
• Where a settlor died before 6 April 2025, charges on foreign settled property which arise on or after 6 April 2025 will depend upon the domicile of the settlor at the time the property became comprised in the settlement (the old rules)
• For qualifying IIP trusts (mainly trusts created on death) there is an additional test from 6 April 2025.  Property comprised in the settlement is only excluded property if both the settlor and IIP beneficiary are not long-term UK resident at the time of the chargeable event.
  
  

Transitional provisions for trusts

• Where excluded property was comprised in a settlement on or before 30 October 2024, it will not be subject to charge under the gift with reservation provisions, on death, where the property remains settled property and is situated outside the UK at the time of the chargeable event 
• Where excluded property is comprised in a qualifying IIP settlement before 30 October 2024, it will not be subject to certain charges under the IIP regime where the property is situated outside the UK at the time of the chargeable event     
• In both cases, whether the foreign property comprised in the settlement at 30 October 2024 was excluded property will depend on the domicile of the settlor at the time the property became comprised in the settlement (the old rules). 

Additions to existing settlements or new settlements made on or after 30 October 2024 cannot benefit from transitional protection. If there is property in an existing settlement which is excluded property as at 30 October 2024, an addition of property to the settlement after 30 October 2024 which cannot itself meet that criteria will not affect the original excluded property.
 

Have the new rules bought more certainty?

For most clients, the rules on whether worldwide assets or just UK situs assets are within scope will feel very similar with the same outcome as before. Domicile was often referred to as ‘sticky’ though. Once someone acquired a UK domicile it was hard to get certainty as to whether they had lost it upon leaving the UK. The new rules will certainly bring more clarity for ‘leavers’ in particular, providing a set number of years that must pass before only UK situs assets remain in scope of IHT which is a welcome change.