Inheritance Tax Reform: Why Residence Is Now the Deciding Factor

Inheritance tax (IHT) has entered a new era for internationally mobile individuals.

The UK has moved decisively away from the long-established concept of domicile and instead anchored inheritance tax exposure to residence. This shift has wide-ranging consequences, particularly for internationally mobile individuals and families with assets held across multiple jurisdictions.

The move from domicile to residence

Historically, an individual’s domicile status played a pivotal role in determining whether their worldwide estate fell within the scope of UK inheritance tax. That approach has now been replaced by a residence-based framework designed to provide clearer, more objective criteria, but one that has significantly broadened the reach of IHT.

Under the new rules, the treatment of assets will depend on both their location and the individual’s UK residence history.

How the new rules work

• UK assets will remain subject to UK inheritance tax regardless of the individual’s residence status. This represents continuity rather than change.

• Non-UK assets will fall within the scope of UK inheritance tax once an individual has been UK resident for 10 out of the previous 20 tax years.

The new rules introduced the concept of a “long-term resident”, which replaced domicile as the key test. Once an individual meets this threshold, their overseas assets can become exposed to UK inheritance tax.

Crucially, this exposure does not necessarily end when UK residence ends. An individual may potentially remain within the inheritance tax net on non-UK assets for up to ten years after leaving the UK, extending IHT risk well beyond the period of active UK residence.

Why this matters for international families

For individuals with international lifestyles, the implications are significant. Those who might previously have assumed that non-UK assets were sheltered from UK inheritance tax- based on non-domiciled status - may now find that IHT exposure arises much earlier than expected.

Families with cross-border wealth, overseas property portfolios, family businesses, or investment structures will need to reassess long-term succession plans. The timing of UK residence, departures from the UK, and inter-generational transfers all become more critical under the new regime.

Trusts and excluded property

The reforms also have major consequences for trust planning. Under the previous system, certain Excluded Property Trusts had historically been used to hold non-UK assets outside the scope of UK inheritance tax.

Since April 2025, where the settlor qualifies as a long-term resident, these trusts will no longer benefit from excluded property status. This means assets that were previously protected will be brought within the inheritance tax net, altering the effectiveness of established trust structures.

The case for proactive planning

Taken together, these changes reinforce the importance of forward-looking estate and succession planning. Residence patterns, asset location, and the structure of ownership will all need careful review. For internationally connected families, early advice and strategic planning will be essential to manage exposure and avoid unintended inheritance tax consequences.

Since 1986 Friend Partnership has provided advice to internationally successful individuals. We pride ourselves on the close and long-lasting relationships we have built with our clients. Our in-depth knowledge of Tax and Inheritance matters means that we can provide you with reliable advice.

If you would like to know more about our services or discuss any matter relating to the new rules, please get in touch with our Head of Tax, David Gillies on 0121 633 2007, by e-mail at david.gillies@friendllp.com or alternatively complete the enquiry form below.