Extension to IHT – the impact on long term UK resident non-doms

We recently covered the impact of the 2024 Autumn Statement on non-UK domiciled individuals, with a focus on the abolition of the concept of domicile and the introduction of the new Foreign Income and Gains regime along with transitional reliefs for existing non-doms. In this second blog, we consider some of the wider UK tax impacts associated with the end of the existing regime for non-UK domiciled individuals from 6 April 2025. 

• From 6 April 2025, the domicile-based system for Inheritance Tax (IHT) will be replaced with a residence-based system.
• The new system will apply to; 
  • “Long-term resident” individuals,  
  • Certain trust structures which may currently be excluded from the scope of IHT, and 
  • Certain trust structures which are currently within the scope of IHT, but may be excluded going forward. 

When DOES IHT applY?

As a reminder, IHT generally applies in a number of circumstances; 

• On death of an individual (based on the chargeable estate plus any failed potentially exempt transfers in the previous 7 years), 
• On occasion of a chargeable lifetime event (for example a transfer to Trust), 
• For trusts that are within the relevant property regime; 
• On each ten year anniversary of its creation, and  
• On chargeable assets leaving the trust or the relevant property regime.  

Under the current regime (up to 5 April 2025); 

1. Non-UK domiciled individuals are within the scope of IHT on their UK assets only,  
2. Trusts established by a non-UK domiciled settlor are ‘excluded property trusts’ which broadly means that they are chargeable to IHT in limited circumstances – namely when certain UK situs assets are held.  

WHO COUNTS AS A“Long term resident” individual?

From 6 April 2025, all individuals who are ‘long term resident’ will be within the scope of IHT on their worldwide assets.  

The test will be whether at the time of the IHT event, the individual has been UK resident for at least 10 of the previous 20 UK tax years. The impact of this test is that it will capture current UK tax residents, and those who have left the UK but still meet the 10 out of 20 tax year threshold.  

Essentially if you leave the UK and have been resident for the prior 20 years, you will now have to be non-UK tax resident for more than 10 years to escape the UK IHT tax ‘tail’ on your non UK assets.  

Transitional provision & IHT tail

There is to be a transitional provision for individuals who are non-UK domiciled and at 5 April 2025 will have been UK tax resident for between 10 and 14 of the previous 20 tax years. The provision will ensure that these individuals are not considered to be “long term resident” for IHT purposes, provided they are non-UK resident for the 2025/26 tax year.  

For individuals who have been resident in the UK for more than 15, but less than 20 of the previous 20 tax years, a reduced IHT tail will apply if they depart the UK in 2025/26. 

WILL THESE CHANGES Impact trusts and settlors

IHT relevant property regime for trusts 

Post 6 April 2025, whether a trust’s assets are relevant property (within the scope of IHT) or excluded property (outside of the scope of IHT) will no longer always depend on the domicile status of the settlor at the time the trust was created. 

1. For trusts where the settlor has died before 6 April 2025, the old rules will apply to determine if the assets of the trust are within the scope of the relevant property regime and therefore IHT.  
2. For trusts where the settlor is either alive or has died after 6 April 2025, whether the trust assets are relevant property or excluded property will depend on if the settlor is (or was at death) “long term resident” in the UK. 

The above is applicable for discretionary trusts and interest in possession trusts, but is should be noted that there are special rules that are applicable to Qualifying interest in possession (QIIP) trusts which are not outlined in this blog. 

There are a number of outcomes to consider as a result of the changes; 

• Trusts which currently have a non-UK domiciled settlor who is “long term resident” in the UK may be brought within the scope of IHT. 
• For trusts with a UK domiciled settlor, where the settlor is not “long term resident”, the trust will become an excluded property trust and an IHT exit charge will arise on 6 April 2025. Thereafter IHT will not be applicable on the trust assets, unless it holds certain types of UK assets.  
  • Similarly, where a living settlor ceases to be “long term resident”, this will result in trusts settled by them becoming excluded property trusts therefore resulting in an IHT exit charge. 

Gift with Reservation of Benefit (GRWOB) rules for settlors

The GRWOB rules apply broadly where an individual gives something away, but is still able to benefit from the assets gifted. An example of which is a Trust which the settlor can benefit from.  

From 6 April 2025, these rules are to be modified to extend to settlors who are “long term residents” in the UK and can benefit from trust structures which they established. The effect is to bring the value of the impacted trust into the estate of the settlor for IHT purposes.  

Its worth noting that per the technical guidance issued by HMRC;  

• Both the above regime for relevant property trusts and the GWROB rules can apply to settlor interested structures which is potentially a form of effective double taxation, however 
• Where non-UK assets were in a settlement and were excluded property before 30 October 2024, the GWROB rules will not apply to these assets. 

Who should take action now

Existing non-UK domiciled individuals who have been resident in the UK for more than 10 of the previous 20 tax years should consider their IHT position. This could be; 

• Planning for a potential IHT liability,  
• Considering whether to leave the UK,  
• considering whether the country of their current domicile has an estate taxes / IHT treaty which may assist in mitigating the UK tax exposure, 
• Reviewing existing trust structures to assess whether they continue to meet the needs of the beneficiaries.
• UK resident settlors of trust structures which are not currently within the relevant property regime.
• UK domiciled settlors of trusts where the settlor is not “long term resident” in the UK. 

There are no doubt additional implications which will in time require consideration. We are expecting a consultation on the IHT changes impacting trusts therefore the application and practicalities surrounding the implications outlined in this blog are not yet fully understood. Nevertheless, this is a complex area and impacted settlors and trustees will need to consider how the changes will impact existing structures. 

If you have any queries about the new IHT regime, or need assistance in navigating the changes, we are here to help. Please do not hesitate to get in contact with Gunhild Dam and Joel Nuttall, a member of our Private Client team or your usual AAB advisor.