A new ‘modernised residence-based regime’: Inheritance Tax

Inheritance Tax (IHT) has traditionally been a domicile-based tax; however, the recent Spring Budget proposed a new ‘modernised residence-based regime’, which seems set to make significant changes to IHT from 6 April 2025.

The concept of Domicile

The term domicile traces its roots to the Latin word “Domus”, meaning “Home”. As a concept, domicile broadly means the country that you consider to be your home or where you have your permanent home has often been criticised for being outdated, ambiguous and subjective, as opposed to the objective more factually driven rules-based concept of residency.

The current rules – Individuals

Under the existing rules, IHT is primarily based on two things, the situs, or location of an asset and a persons domicile status at the date of the tax charge.

A UK domiciled or ‘deemed domicile’ (a person resident in the UK for 15 out of the last 20 years) individual is subject to IHT on their UK and worldwide assets. Whereas a person who is not UK domiciled is generally only subject to IHT on their UK situs assets.

The current rules – Trusts

As with individuals, IHT is usually based on the situs of an asset and the domicile of the settlor at the time the settlement is created.

In a similar vein to individuals, generally worldwide assets settled by a UK domiciled or deemed domiciled settlor are subject to IHT. Whereas only UK situs assets settled by a non-UK domiciled settlor are subject to IHT.

Non-UK assets settled by a non-UK domiciled settlor are currently deemed to be, in the jargon, ‘excluded property’ and are not subject to IHT, unless a very narrow set of criteria are met.

The position from 6 April 2025 – Individuals

It is proposed that the existing domicile-based regime will be replaced with a residency-based system. The finer details are yet to be published by the government, but it is envisaged that an individual who has been resident in the UK for 10 years will be subject to IHT on their UK and worldwide assets, with a provision to keep an individual within the scope of IHT for 10 years after leaving the UK.

At present, it is understood that UK situs assets will remain within the charge of IHT, regardless of residence status.

The position from 6 April 2025 – Trusts

It is proposed that the chargeability of assets comprised in a settlement will depend on whether a settlor meets the ‘residence criteria’ (resident in the UK for 10 years) at the time the assets are settled and/or when IHT charges, such as principal or exit charges, arise on the settlement.

At present, it is understood that UK situs assets will remain within the charge of IHT, regardless of residence.

The treatment of non-UK assets that are settled by a non-UK domiciled individual on or before 5 April 2025 will not change. Provided that the assets of the settlement continue to meet the criteria to be classified as ‘excluded property’, there will be no IHT charges.

Conclusion

Whilst the plans are subject to change following the IHT consultation and if we have a change of government and associated budget announcements before the proposed tax changes come into force from 5 April 2025 , the above gives a glimpse into a post-domicile IHT regime based on residence, which seems set to be the biggest change to IHT in some time.

Get in touch

If you have any concerns about the new regime, would like to review any current arrangements in place with the view of considering any tax advisory planning in this area of your affairs, or would like to discuss your IHT position in further detail, please contact your local Whitings LLP office today.

This blog is supplementary to James Selby’s blog: The end of the non-UK domiciled tax regime? – Whitings LLP : Whitings LLP

Disclaimer - All information in this post was correct at time of writing.