Long term residency: Inheritance tax reforms for UK non-domiciles

What were the old rules?

Where an individual was UK domiciled or deemed domiciled, they would pay IHT on their worldwide assets. Domicile is a complex UK common law concept; a person born in the UK acquires a domicile of origin which is only lost, and a domicile of choice acquired, if that person has their permanent home in another country and severs all ties with the UK.

Deemed domiciled was where an individual had been UK resident for at least 15 of the previous 20 tax years.

Where a person was non-domiciled they would only pay IHT on their UK assets.

The concept of domicile is still important in deciding which law applies but it is no longer important for tax issues.

What changed from 6 April 2025?

From 6 April 2025 whether an individual pays IHT has moved from a domicile-based system to a residence-based system. The distinction between individuals who are UK domiciled or deemed domiciled and those who are non-domiciled, will be replaced by a distinction between those who qualify as LTRs and those who don’t.

Who will be a long-term resident?

The Finance Act 2025 made major changes to the tax rules for ‘non-doms’. Non-dom describes a UK resident whose permanent home – or domicile – for tax purposes was outside the UK. Being a non-dom meant that you only paid UK IHT on assets that you held in the UK (not on your worldwide assets).

From 6 April 2025 an individual who has been resident in the UK for at least 10 out of the previous 20 tax years, will be classed as a long-term resident (LTR). This means that people who were previously non-doms (had not been in the UK for at least 15 of the previous 20 years) could become a LTR.

For example, Anil has been resident in the UK for 11 years so is currently either domiciled or deemed domiciled. However, as he has been UK resident at least 10 out of the previous 20 tax years he would become a LTR from 6 April 2025 and therefore will pay IHT on his worldwide assets.

There are transitional rules for individuals who are neither UK resident nor UK-domiciled or deemed domicile in 2025/26 tax year. Those individuals will only be considered LTR if they meet the existing deemed domiciled test:

• UK resident for 15 out of the previous 20 tax years immediately before the relevant tax year; and
• UK resident in the current year or one of the three previous tax years ending with the relevant tax year.

If we take the example of Anil as he has only been resident in the UK for 11 years, if he leaves the UK before 2025/26 and doesn’t return, he would not be considered an LTR. 

However, if Anil returned to the UK, the new rules would apply to him and he would be subject to the 10 out of 20 years residence test, which would include the years of residence in the UK up to 2024/25.

Zhanti lived in the UK from 2007/08 but became non-resident in 2024/25.  As Zhanti had been UK resident for 17 years she was  deemed domiciled under the old rules. Under the transitional rules she will be classed as an LTR until 2027/28 and will therefore pay IHT on her worldwide assets.

What are the effects of being long-term resident?

An LTR will be subject to IHT on assets situated in both the UK and aboard. This effectively means that an individual moving to the UK has a ten-year period where they would only pay IHT on UK situated assets.

If an individual becomes an LTR and subsequently leaves the UK, it will take between three and ten years for them to be outside the scope of IHT (tail provision). Where the individual has been resident for 13 years or less, they will remain an LTR for three full tax years after leaving the UK. This ‘tail’ will increase by one year for every additional year of UK residency until the ten-year ‘tail’ is hit.

Having this ‘tail’ can mean that gifts made by LTRs may fall within the scope of IHT even if the individual, at the time of their death, is no longer an LTR.

The LTR test will reset where an individual has been non-resident for 10 consecutive years before returning to the UK.

Spouse exemption and election

Before 6 April 2025 a non-domiciled spouse/civil partner of a UK domiciled individual could elect to be treated as UK deemed domiciled for IHT purposes. This meant that the spouse exemption was unlimited and not capped at £325,000.

From 6 April 2025, the election rules have been amended so that a non-LTR spouse/civil partner of a LTR individual can elect to be treated as LTR. The election will last until 10 consecutive tax years of non-residence has elapsed.

From 6 April 2025, it will still be possible to make a domicile election which covers a period before 6 April 2025. In this case, the person making the election will be treated as deemed UK domiciled until 5 April 2025 and then LTR from 6 April 2025 until 10 consecutive tax years of non-residence have elapsed.

Once an election has lapsed due to the requisite period of non-residence, the electing spouse’s/civil partner’s IHT position going forward will depend on whether they satisfy the LTR test.

Double taxation conventions

The UK has 10 IHT double tax conventions and there are no changes to the treaties or how these operate.

The following double taxation conventions apply to Inheritance Tax.

• Republic of Ireland
• South Africa
• USA      
• Netherlands
• Sweden
• Switzerland

Treaties with France, Italy, India and Pakistan were in place before 1975 during the Estate Duty era and have different rules to eliminate double taxation.