British expats and their families are set to be the biggest winners from changes to UK inheritance tax, so long as they move overseas. The changes kick in with the new tax year this April (2025).
Particularly for older people, delaying your move abroad could reduce your chances of benefitting from the new rules. If you haven’t already, get advice and start making plans to protect your loved ones’ inheritance.
Ground-breaking new rules mean that living abroad for a certain number of years will make British citizens exempt from UK inheritance tax (IHT) on worldwide assets. Thanks to changes announced at last autumn’s budget, and applicable from 6th April 2025, every UK citizen living abroad for 10 years or more will be exempt from IHT on all assets held outside the UK. Exemption will come quicker for some individuals, depending on how long they were resident in the UK before moving overseas.
What has changed?
In short, the UK Government has altered the way it determines IHT liability, switching from a domicile to residence-based system. This should make things clearer and easier to navigate, according to legal experts.
Under existing regulation, any individual who is classed as UK domicile is subject to UK IHT on their entire worldwide estate, including overseas property. An individual acquires their domicile (officially ‘domicile of origin’) at birth. Typically, it is based on your parents’ domicile and indicates where your permanent home or the jurisdiction to which you are most connected is deemed to be. You might travel and live in different countries during your lifetime but usually your domicile remains the same.
Most UK citizens residing in a foreign country remain UK domiciled indefinitely, which under current rules means their worldwide estate falls within the scope of UK IHT rules. It is possible but not easy to acquire a new domicile country (officially ‘domicile of choice’). This involves moving to a different jurisdiction and forming a permanent or indefinite intention to remain there without any ties to your former domicile, such as family commitments or holding assets there.
The big news is that from 6 April, only long-term residents in the UK will be subject to IHT on their worldwide estate, regardless of their domicile. An individual qualifies as a long-term resident when they have held UK residency for at least 10 out of the last 20 tax years. Or for individuals under 20 years old, if they have been UK resident for at least 50% of tax years in their lifetime.
Implications for new and existing expats
First off, UK citizens who have been resident outside of the UK for 10 years or more will benefit from the changes immediately and from 6 April 2025 become exempt from IHT on all non-UK assets.
A fresh start in retirement, and more money to pass on.
Under the new rules, individuals who relocate and become non-UK resident after April 2025 will remain subject to IHT for between three and ten years (the so-called ‘tail’), depending on how long they had been UK resident. Worst case scenario is waiting 10 years for exemption, which applies to anyone who was UK resident for 20 years or more. Individuals who were UK resident between 10 and 13 years must wait just three years, rising by one year for every additional year of UK residence (until it hits the maximum of 10 years).
For existing expats who are already non-UK resident but for less than 10 years, the understanding is that they will no longer be liable after three years abroad after 6 April.
UK assets and unilateral relief
Remember, assets based in the UK will always fall within the scope of UK IHT, regardless of whether the individual is resident in the UK or abroad.
British expats abroad will likely have IHT obligations in their country of residency but double tax treaty or unilateral relief application should ensure your estate is not double-taxed. High value estates of UK domiciled citizens living abroad often incur a balancing payment of UK inheritance tax payable through unilateral relief application. The process can be time-consuming and complex and must take into account exchange rates and different cross-border taxation schemes. Considering both the new IHT rules and the UK’s comparatively high IHT rate of 40 per cent, holding onto UK assets is increasingly unattractive for many expats.
Cross-border tax specialists point out that 2025 could be an opportune time to consider re-structuring your estate and moving any UK assets overseas, thereby eliminating your liability in the UK altogether. This option could make a lot of sense and potentially slash your IHT bill completely for individuals moving to a country with minimal or no IHT, such as Cyprus or Malta. Always speak to a cross-border tax specialist for professional advice.
Returning to the UK
As part of the October budget, the government also announced new rules favouring British expats who return to the UK. Under the new FIGS regime, qualifying individuals will be exempt from tax on their foreign income and gains (FIGS) for their first four years of UK residence, regardless of whether they receive that income or gains in the UK. To be eligible, individuals must have been a non-UK resident for at least 10 tax years previous to their arrival.
The FIGS regime could benefit British expats wishing to return to the UK for a short period, for example for business reasons, to care for elderly parents, to settle children in at a UK school, or to cease being resident in another jurisdiction for foreign tax planning reasons.
