UK expatriates have always had to consider UK inheritance tax (IHT) in their succession and gifting strategies. However, as of 6 April 2025, UK IHT liability is now based on residency rather than domicile, offering new opportunities for expatriates to rethink and enhance their planning.
Old Rules vs. New Rules
Historically, your domicile, not your residency, determined your exposure to UK IHT. For many UK expatriates, this meant that even after living abroad for many years, their UK domicile status continued to tie their worldwide assets to UK IHT. With the new rules, UK IHT liability is determined by whether or not you are considered a UK Long Term Resident (LTR).
Gaining and Losing Long Term Resident (LTR) Status
To be considered LTR, an individual must have been UK resident for 10 out of the last 20 years. Therefore, someone who has left, or is leaving, the UK can be considered non-UK LTR when they have lived outside the UK for over 10 years. It could be as little as 3 years if they were UK resident for between 10 and 13 years, increasing by a year for every additional year they lived in the UK up to 20 years.
This means there is a large population of UK- domiciled individuals living long-term outside the UK who, from 6 April 2025, will require a different approach to how they structure their wealth and onward gifting and succession plans.
Key Areas for Expats to Address in Their Planning
Reviewing UK Assets
Even if an individual is non-UK LTR, UK-situs assets will still be subject to UK IHT. This means that reviewing existing UK assets is more important than ever. Could they be restructured to minimise IHT exposure, or is it time to move assets out of the UK? A simple option is to transfer these assets in-specie to an insurance-based wealth solution from an international provider.
Retirement Planning
Starting in April 2027, UK pensions will be subject to IHT, eliminating the IHT protection they previously enjoyed. A UK pension will be treated like any other UK asset for IHT. This presents an opportunity to revisit retirement plans. It may be beneficial to access UK pensions earlier than originally planned. For example, a non-LTR living in a tax-friendly jurisdiction with the right Double Tax Treaty with the UK (e.g., the UAE) could access their pension in full and utilise an insurance solution from an international provider to keep it out of the IHT net.
Simplifying Succession Planning
With UK IHT considerations potentially less of a concern, succession planning could be much simpler. For clients with straightforward needs, it may now be more cost-effective to use tools like life assurance bonds to nominate beneficiaries and pass on wealth without the added complexity of factoring exposure to UK IHT into their plans.
Addressing Complex Succession Planning Needs
For clients with more complex succession planning requirements, the break between domicile and IHT can provide greater flexibility. Discretionary trusts become an attractive option, allowing clients to settle capital in trust without the previous barrier caused by treating such transfers as Chargeable Lifetime Transfers.
Planning to Become Non-LTR
For those who have left the UK but haven’t yet reached the 10-year residency mark, a term assurance policy written in trust could be an effective solution. This would provide a tax-free lump sum that could be used to cover any potential UK IHT liability that may arise as a result of the individual’s death during the 10-year “tax tail.”