Long term resident and inheritance tax

What are the current rules?

Where an individual is UK domiciled or deemed domiciled, they will 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 is where an individual has been UK resident for at least 15 of the previous 20 tax years.

What’s changing from 6 April 2025?

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

Who will be a long-term resident?

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 an 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 will 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. 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 has been UK resident for 17 years so is deemed domiciled under the current rules. She became non-resident in 2024/25 and doesn’t return to the UK, however, under the transitional rules she will be classed as an LTR 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.

So in the case of Zhanti it will take seven years for her to become a non-LTR.

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

Under current rules a non-domiciled spouse/civil partner of a UK domiciled individual can elect to be treated as UK deemed domiciled for IHT purposes. This means that the spouse exemption is unlimited and not capped at £325,000.

From 6 April 2025, the election rules will be 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.