Domicile to Residency Test
Prior to 6 April 2025, the extent to which an individual's worldwide estate was subject to UK Inheritance Tax depended on their domicile. The concept of domicile is complex and there were a number of tests previously used to determine this, including a deemed domicile test for tax purposes, essentially providing that an individual would be deemed UK domiciled if they were UK resident for 15 out of a 20-year period before their death or the relevant event. In many cases, though, an individual could be considered UK domiciled with fewer years of UK residence or even if they were non-UK resident but originally from the UK. Under the domicile regime, where an individual had a domicile outside of the UK at the date of a chargeable event (i.e. on death or on the transfer into certain kinds of trusts), any non-UK assets owned by them at that date would have been excluded from UK Inheritance Tax.
The main change in terms of Inheritance Tax, from 6 April 2025 (where the relevant event occurs after that date), is that when considering whether an individual's worldwide assets are subject to UK Inheritance Tax, domicile will no longer be considered, with a move to a residence-based system. Now, anyone considered a Long-Term Resident in the UK will need to consider the impact of UK Inheritance Tax on their overseas assets as well as the assets held in the UK.
There are also transitional rules for non-domiciled or deemed domiciled individuals who are non-resident in the tax year 2025/26. To benefit from these transitional rules, individuals must be able to demonstrate that they were not domiciled in the UK on 30 October 2024. Therefore, the concept of domicile will continue to be relevant for these purposes.
What Will Now Be Subject to UK Inheritance Tax
With the new residence-based test, we need to consider what will be subject to UK Inheritance Tax. UK assets will remain subject to Inheritance Tax on the same basis as previously, regardless of residence. IHT will also be charged on non-UK assets owned outright by an individual when that individual is considered a Long-Term Resident.
It is important to note that reliefs from UK Inheritance Tax may still be available, and the Nil Rate Band and potentially the Residence Nil Rate Band might also apply and should be considered when reviewing the position.
Many trusts in the UK which form part of the "relevant property regime" are also subject to UK Inheritance Tax. The change in the rules will therefore have an impact on trusts and should also be reviewed.
When Is an Individual Considered a Long-Term Resident?
The Long-Term Residence test considers whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) occurs.
The individual then remains within the definition of Long-Term Resident after leaving the UK for a period of time. If an individual has been UK resident for at least 10 out of 20 years and then becomes non-resident and does not return to the UK before the chargeable event, there will be provision to shorten the length of time they remain a Long-Term Resident if they had been UK resident for between 10 and 19 years out of the last 20.
For those who are UK resident for between 10 and 13 years, they will remain within the scope for three tax years after leaving the UK.
This will then increase by one tax year for each additional year of residence.
For example, where an individual was resident for 15 out of 20 tax years on leaving, they would remain within the scope for five years; if resident for 17 out of 20 tax years on leaving, they would remain within the scope for seven tax years.
An individual will not be treated as a Long-Term Resident for UK Inheritance Tax purposes in the year following 10 consecutive years of non-residence, even if they return to the UK, and the test is effectively reset.
The Long-Term Residence test applies regardless of an individual’s common law domicile. Despite this, it is important to always review the wider circumstances of each individual, including the provisions of any relevant tax treaties.
Domicile Remains Relevant
Although the new residence-based regime will apply regardless of an individual's common law domicile, it is important not to dismiss domicile when considering succession planning and Will drafting. An individual's domicile will dictate the jurisdiction of the law of succession of their estate on death. Therefore, it is still a very important aspect to consider and something that we have significant experience advising on at MFMac. We regularly work with international clients or clients based in the UK who have international aspects to their affairs.
How MFMac Can Help
With the recent changes, it is important for those with international aspects to their affairs to review their succession plans, as their position may have changed with the move to the residence-based test. These changes could significantly change the UK Inheritance Tax position and there may be planning which can be done to mitigate the impact.
Both Long-Term Resident and domicile rules are complex elements of the UK tax system and succession law. Therefore, it is important that, if there are any cross-border elements to an individual's life, assets or estate on death, expert professional advice is sought in the relevant jurisdictions. At MFMac, our succession planning experts regularly work with international clients or clients based in the UK who have overseas aspects to their affairs. We work closely with our clients' overseas and other UK-based advisers to ensure a co-ordinated approach to their succession planning. Please get in touch if we can help you to review your affairs.
This article is for general information only and does not constitute legal or tax advice. Specific advice should be sought for your individual circumstances. MFMac's succession planning experts can help you understand how these changes may affect your affairs. Please get in touch with our team to discuss your circumstances.
