New Strategies for UK Inheritance Tax Planning: Adapting to Changes in April 2025

UK tax

3 Dec

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The UK's upcoming inheritance tax (IHT) reforms are set to bring significant changes to how non-domiciled individuals (non-doms) and expatriates manage their estate planning. Beginning in April 2025, the shift from a domicile-based to a residence-based tax system means that long-term UK residents will face a global inheritance tax liability, fundamentally altering the strategies needed for effective estate planning.

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This article explores the implications of these changes and outlines practical strategies for non-doms and expatriates to mitigate their exposure under the new rules.

Key Changes in the UK Inheritance Tax Regime

The April 2025 reforms mark a major shift in the UK's approach to inheritance tax:

Residence-Based Taxation
Under the current system, IHT is determined by an individual's domicile status. Non-doms are taxed only on their UK assets unless they become "deemed domiciled" after 15 years of UK residence. However, from April 2025, taxation will be based on residency rather than domicile:
- Individuals who have been UK residents for at least 10 out of the preceding 20 tax years will be considered "long-term residents" and subject to IHT on their worldwide assets.
Extended Liability for Departing Residents
The period during which former residents remain liable for IHT on their non-UK assets depends on the length of prior UK residence:
- 10–13 years of UK residence: IHT liability persists for 3 tax years after leaving.
- Each additional year of residence beyond 10 years: Extends the liability by one year, up to a maximum of 10 years.
Transitional Provisions for Non-Doms
For non-domiciled individuals who are not UK tax residents as of the 2025–26 tax year and were non-UK domiciled on 30 October 2024, transitional rules will apply. These provisions may provide temporary relief, but the specific details require careful analysis.

Practical Challenges for Non-Doms and Expats

The reforms introduce complexities for those with international ties, including:

Dual liability in multiple jurisdictions, particularly for expatriates with assets in the UK and abroad.
Potential conflicts between UK IHT rules and local inheritance or estate taxes in other countries.
Increased administrative burdens for tracking residency status and complying with cross-border tax regulations.

Strategic Approaches for Tax Planning

Review and Update Estate Plans
With the transition to residence-based taxation, individuals must reassess their existing estate plans. Key considerations include:
- Whether assets are structured to minimise exposure to UK IHT.
- Ensuring that non-UK assets are held in vehicles that remain outside the UK tax net.
Utilise Excluded Property Trusts
Excluded property trusts remain one of the most effective tools for protecting non-UK assets from IHT. Non-doms can place overseas assets into these trusts before becoming "long-term residents."
- Timing is Critical: Assets added to the trust after reaching the 10-year residency threshold may not qualify as excluded property.
Lifetime Gifting
Gifting remains a cornerstone of IHT mitigation:
- Gifts made at least seven years before death are generally exempt from IHT.
- Annual gifting allowances (currently £3,000 per year) can reduce the taxable estate over time.
- For non-doms, consider how gifts to overseas recipients may be treated under local tax laws.
Strategic Timing of Residency
For individuals planning to move to or leave the UK, understanding the 10-year residency threshold is essential. By carefully timing their UK presence, non-doms can:
- Avoid becoming long-term residents.
- Limit the "tail" period of post-residency IHT liability.
Diversify Asset Holding Structures
Consider transferring assets into family trusts, holding companies, or other legal structures that can offer tax efficiency. For example:
- Non-UK property can be held through non-UK companies or partnerships to shield it from UK IHT.
- Reviewing ownership of UK property to ensure it aligns with tax planning objectives.
Maximise Double Tax Treaties
Many countries have double tax treaties with the UK, which can provide relief from double taxation on the same assets. Consulting with a tax advisor familiar with cross-border estate planning is crucial to leveraging these treaties effectively.
Insurance as a Mitigation Tool
Life insurance policies can provide liquidity to cover IHT liabilities, ensuring that other assets remain intact for heirs.
- Non-doms should consider offshore policies, which may offer greater tax efficiency.
Understand the Transitional Rules
For non-domiciled individuals planning to leave the UK before April 2025, understanding the transitional provisions will be vital. These rules may provide an opportunity to safeguard non-UK assets before the new system takes effect.

Broader Considerations

In addition to these strategies, individuals should stay informed about potential future changes to the UK tax system. Political factors may influence inheritance tax thresholds, rates, and exemptions, requiring ongoing adjustments to estate plans.

Summary

The April 2025 inheritance tax reforms present both challenges and opportunities for non-doms and expatriates. By taking proactive measures now, individuals can position themselves to navigate the new rules effectively and minimise their tax exposure.

Consulting with experienced tax advisors and legal professionals is essential to tailor strategies to your unique circumstances. With careful planning, it’s possible to preserve wealth, ensure compliance, and achieve peace of mind in this evolving tax landscape.