Inheritance tax for UK expatriates: what the new IHT proposals could mean

On 30 October 2024, the UK Government announced a transformative change to UK Inheritance Tax (IHT) policy, moving from a domicile-based system to a residence-based approach.

When does the inheritance tax change?

Scheduled to take full effect on 6 April 2025, this overhaul means individuals who have been UK-resident for 10 out of the previous 20 tax years will face IHT on their worldwide estate. For British expatriates (expats) with assets in multiple jurisdictions, it is essential to understand how residence is determined for tax purposes- particularly under the Statutory Residence Test (SRT)- and what steps to take to ensure efficient cross-border estate planning.

The following commentary attempts to answer some of the key questions those advising expats are likely to encounter, based on the existing technical guidance from the Government and draft legislation.

What is so important about the change to inheritance tax?

Traditionally, IHT liability depended on whether an individual was UK-domiciled- with non-domiciled persons (non-doms) only taxed on UK-sited assets and UK-domiciled individuals taxed on worldwide assets. Although deemed-domicile rules tightened the framework (e.g. “15 out of 20 years” in the UK), many found domicile-based criteria difficult to navigate. By contrast, the new approach uses residence as the primary factor, extending IHT to those meeting a “10-out-of-20-year” residence threshold.

For British expats, this shift means sporadic or partial UK residence can accumulate to a point where their global estate is subject to IHT. Understanding the SRT- a key mechanism for determining UK tax residence- thus becomes pivotal.

What is the SRT?

Introduced in 2013, the SRT provides a structured framework for deciding whether an individual is resident in the UK for a given tax year, and is thus subject to UK Income Tax (IT) and Capital Gains Tax (CGT) on worldwide income and gains. It is broken down into three parts:-

• Automatic Overseas Tests: If an individual meets any of these criteria- such as spending fewer than 16 days in the UK in a tax year- they are automatically non-resident.
  
  
• Automatic UK Tests: If someone satisfies conditions such as having their only home in the UK for more than 90 days (and spending at least 30 days there), they are automatically resident.
  
  
• Ties and Days Count (Sufficient Ties Test (STT)): If neither the overseas nor UK tests resolve a client’s status, one must examine how many “ties” they have to the UK (e.g., family, accommodation, work, time spent in the UK in prior years) and how many days they spend in the UK during the tax year.

For internationally mobile clients, the STT will likely be the most important aspect of the SRT for them to understand. The way that the STT operates in practice depends on whether or not someone has been resident in the UK in one of the three tax years prior to the tax year under consideration: the STT distinguishes between those (i) arriving in, and (ii) leaving from the UK. Depending on which category a taxpayer falls into, the number of days, and number of ties permitted before they will be classed as UK tax resident for that year will be different.

What is the ‘10-out-of-20 Rule’ for IHT?

The SRT has historically been important for determining a taxpayer's exposure to IT and CGT. From 6 April 2025, it will become the tool to determine their exposure to IHT too: if a taxpayer is resident in the UK for 10 of the preceding 20 tax years, they will be deemed a “Long-Term Resident” for IHT purposes. This status causes their worldwide estate to fall within UK IHT, rather than just UK-sited property. Important points to note include:

• Aggregating Sporadic Visits: Individuals may believe they have left the UK, but if their frequent returns each year pass the SRT threshold, those tax years can accumulate.
  
  
• Triggering Event: Death while classified as a Long-Term Resident (or during a tail period after ceasing UK residence) can subject an individual’s global assets- cash, property, shares- to UK IHT.

Can someone escape the IHT net?

If someone leaves the UK after acquiring Long Term Resident status, their foreign assets will not be immediately shielded from IHT on death. Under the proposed rules, a “tail” can apply to Long Term Residents following their departure from the UK, and the length of that tail will depend on the exact timeframe that someone is resident in the UK.

Why does the inheritance tax change matter for expats?

Historically, expats needn’t have been overly concerned with IHT where the bulk of their wealth was situated outside the UK - if they were to claim a foreign domicile on death, only their UK assets would have been within the IHT net. However, with the move to a residence-based system of IHT, expats need to be more conscious of their position under the SRT.

What should advisers do?

It will be more important than ever to understand client intentions, and what their long-term plans are. While every client’s circumstances will be different, some basic steps that could be taken include:

• Track time spent in the UK: encourage clients to forward plan, advising you on when they intend to visit the UK and for how long.
  
  
• Understand the client’s UK base: expats often maintain varied links to the UK, so there is sense in establishing their number, permanency and strength.
  
  
• Collaborate across borders: liaise with qualified advisors to understand the IHT and foreign tax consequences of clients dying Long Term Resident in the UK.

The Government’s decision to move to a residence-based system of IHT may motivate clients to consider their long-term commitment to the UK, ahead of the legislation to implement these changes being finalised. Regardless of an individual's feelings regarding the proposed changes, any decisions on their future should follow careful and considered planning.