Personalised Tax Planning For Residence-Based Inheritance Tax Rules Effective April 2025-26
- MAZ
- 3 days ago
- 17 min read
The Audio Summary of the Key Points of the Article:
Understanding the New Residence-Based IHT Rules and Their Impact
So, you’re a UK taxpayer or business owner, and you’ve heard about the big shake-up in inheritance tax (IHT) rules coming in April 2025. Let’s cut through the jargon and get to the heart of what these changes mean for you. From 6 April 2025, the UK is switching from a domicile-based to a residence-based IHT system, a move that’s set to reshape how your worldwide assets are taxed when you pass away or make certain transfers. This part will break down the new rules, who they affect, and why they matter, with a focus on practical implications for your estate planning.
What Are the New Residence-Based IHT Rules?
Let’s start with the basics. Up until 5 April 2025, IHT was tied to your domicile—a legal concept about your permanent home, often your country of birth or where you intend to stay indefinitely. If you were non-UK domiciled, your overseas assets were generally exempt from IHT, unless you’d been UK resident for 15 out of 20 years (deemed domicile). From 6 April 2025, domicile is out the window for IHT purposes. Instead, your tax residency determines your IHT liability. If you’re a long-term UK resident—meaning you’ve been UK tax resident for 10 out of the last 20 tax years—your worldwide assets are in the IHT net.
UK assets, like property or bank accounts, are always taxable, regardless of residency.
The kicker? Even if you leave the UK, your worldwide assets could stay taxable for up to 10 years, depending on how long you were a resident. This “tail period” starts at three years for those resident 10–13 years and scales up to 10 years for 20+ years of residency. This is a game-changer for internationally mobile individuals or those planning to retire abroad.
Table 1: IHT Tail Periods Based on UK Residency Duration (Effective April 2025)
Years of UK Residency (in last 20 years) | Tail Period After Leaving UK |
10–13 years | 3 years |
14 years | 4 years |
15 years | 5 years |
16 years | 6 years |
17 years | 7 years |
18 years | 8 years |
19 years | 9 years |
20+ years | 10 years |
Source: GOV.UK, Inheritance Tax for Long-Term UK Residents, 6 April 2025 |
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Who’s Affected by the April 2025 IHT Changes?
Now, let’s get personal. These rules hit hardest if you’re a long-term UK resident (10+ years in the UK over the last 20), a non-UK domiciled individual (non-dom) with overseas assets, or a business owner with international holdings. UK nationals living abroad for over 10 years might actually benefit, as their non-UK assets could fall out of the IHT net sooner than under the old rules. If you’re a business owner with a family farm or trading company, you’re also in the crosshairs, especially with reforms to agricultural property relief (APR) and business property relief (BPR) kicking in from April 2026, capping 100% relief at £1 million.
For example, consider Priya, a tech entrepreneur who moved to London from India in 2010. She’s been UK tax resident for 15 years by 2025. Her estate includes a £2 million London flat, £1.5 million in Indian investments, and a £3 million UK tech startup. Under the old rules, her Indian investments might have been exempt if she maintained non-UK domicile status. From April 2025, as a long-term resident, her entire £6.5 million estate is IHT-liable at 40% above the £500,000 threshold (£325,000 nil-rate band + £175,000 residence nil-rate band, if she leaves her flat to her kids). That’s a potential £2.4 million tax bill if she passes away in 2025/26.
Why Did the UK Make This Switch?
None of us love tax changes, but understanding the “why” helps. The UK government, as announced in the Autumn Budget 2024, wants to simplify and modernise IHT to align with how people live today—focusing on residency rather than the complex, often subjective concept of domicile. The shift also aims to close loopholes for wealthy non-doms who used domicile status to shield overseas assets. HMRC estimates this will bring 9,300 more estates into the IHT net annually, boosting revenue by £6–10 billion by 2030. It’s not just about revenue, though; it’s about fairness, ensuring those who call the UK home pay their share.
How Do the New Rules Affect Trusts?
Be careful! Trusts are a big deal in IHT planning, and the new rules shake things up. Previously, non-UK assets in excluded property trusts (EPTs) set up by non-doms were IHT-free, even if the settlor became deemed domiciled. From 6 April 2025, the IHT status of non-UK assets in trusts depends on the settlor’s residency status at the time of an IHT charge (e.g., death, 10-year anniversary, or asset distribution). If the settlor is a long-term UK resident, those assets are taxable. If they leave the UK and lose long-term resident status, non-UK assets can become excluded again, but this triggers an exit charge of up to 6%, prorated based on the trust’s history.
Take Rupert, a non-dom who settled a £5 million offshore trust in 2018 with Singaporean investments. By 2025, he’s been UK resident for 12 years. His trust’s non-UK assets are now IHT-liable because he’s a long-term resident. If he moves to Dubai in 2026, the trust’s assets could become excluded after three years (his tail period), but an exit charge might apply when that happens. Trustees need to track Rupert’s residency meticulously to avoid surprises.
What About Transitional Provisions?
Now, here’s a silver lining. If you’re a non-dom who’s not UK tax resident in 2025/26 and wasn’t deemed domiciled on 30 October 2024, transitional rules apply. You’ll face the current three-year tail (or none, if not deemed domiciled) for IHT on non-UK assets, provided you don’t return to the UK. This gives you a window to leave the UK before April 2025 and potentially escape the 10-year tail. For example, if Priya moves to Singapore by 5 April 2025 and proves non-UK domicile by 30 October 2024, her Indian investments might avoid IHT entirely after three years. Timing is everything here.
This first part sets the stage, giving you a clear picture of the new rules and who’s impacted. Next, we’ll dive into practical, personalised strategies to minimise your IHT liability, tailored for taxpayers and business owners like you.
Practical Strategies for Personalised IHT Planning Under the New Rules
Right, so you’ve got the lowdown on the residence-based inheritance tax (IHT) rules kicking in from April 2025. Now, let’s get to the nitty-gritty: how can you, as a UK taxpayer or business owner, plan smartly to keep your IHT bill as low as possible? This part is all about actionable strategies, tailored to your unique situation—whether you’re sitting on a hefty estate, running a family business, or juggling international assets. We’ll walk through practical steps, real-life scenarios, and tools to help you navigate the new rules like a pro.
How Can You Use the Nil-Rate Bands Effectively?
Let’s kick things off with the basics that apply to everyone. Every individual gets a nil-rate band (NRB) of £325,000, meaning no IHT is charged on the first £325,000 of your estate (as of April 2025, unchanged since 2009, per HMRC). If you’re leaving a home to your children or grandchildren, you can also claim the residence nil-rate band (RNRB) of £175,000, bringing your tax-free allowance to £500,000. For married couples or civil partners, unused NRBs and RNRBs can be transferred to the surviving spouse, doubling the allowance to £1 million.
Here’s the catch: the RNRB tapers if your estate exceeds £2 million, reducing by £1 for every £2 over that threshold. By £2.7 million, it’s gone entirely. So, if your estate’s creeping up—like a £2.5 million estate with a £1 million London flat—you’d lose £250,000 ÷ 2 = £125,000 of your RNRB, leaving £50,000 plus the £325,000 NRB.
Pro tip: Make lifetime gifts to bring your estate below £2 million before death. For example, gifting £300,000 to your kids in 2025 could preserve your full RNRB, saving £70,000 in IHT (40% of £175,000). Just ensure you survive seven years for the gift to be IHT-free, or it’s clawed back into your estate.
Should You Consider Lifetime Gifting?
Speaking of gifts, they’re a powerhouse for IHT planning. Now, consider this: if you gift assets during your lifetime, they could escape IHT entirely, provided you follow the rules. Potentially exempt transfers (PETs)—like cash or property gifted to individuals—become IHT-free if you survive seven years. If you die within seven years, the gift is taxed on a sliding scale (taper relief), dropping from 40% to 8% by year six.
For instance, imagine Elowen, a Cornwall-based business owner with a £3 million estate, including a £1 million family farm. In 2025, she gifts £500,000 to her daughter, Tamsin. If Elowen survives until 2032, that gift is IHT-free, saving £200,000 in tax. If she dies in 2029 (four years later), taper relief cuts the IHT rate to 24%, saving £80,000 compared to keeping the asset in her estate.
You’ve also got annual exemptions (£3,000 per person, carried forward one year) and small gifts exemptions (£250 per person, unlimited recipients). Wedding gifts are another gem: £5,000 to kids, £2,500 to grandkids, or £1,000 to others. These don’t count toward your estate if done odel to something else, but it’s not really a gift if you’re still benefiting from it, right? The catch is, you need to live seven years for PETs to fully escape IHT, so start early.
How Can Business Owners Leverage BPR and APR?
Now, if you’re a business owner, listen up—business property relief (BPR) and agricultural property relief (APR) are your friends, but they’re getting a haircut from April 2026. Currently, BPR offers 100% or 50% relief on qualifying business assets (like shares in an unquoted trading company or a sole trader’s business). APR does the same for farmland or buildings used in agriculture. From April 2026, assets valued over £1 million will only get 50% relief, not 100%, per the Autumn Budget 2024.
Take Jago, who owns a £2 million manufacturing business in Birmingham. Right now, his business qualifies for 100% BPR, meaning no IHT on its value. Post-April 2026, only £1 million gets 100% relief; the remaining £1 million gets 50% relief, so £500,000 is taxable at 40% (£200,000 tax). To reduce this, Jago could gift part of the business to his son, Kensa, in 2025. If he survives seven years, the gift is IHT-free, bypassing the £1 million cap.
Table 2: BPR and APR Changes (April 2025 vs. April 2026)
Relief Type | Current (2025/26) | From April 2026 |
BPR (Trading Business) | 100% or 50% on qualifying assets | 100% up to £1m, 50% above £1m |
APR (Agricultural Assets) | 100% or 50% on qualifying assets | 100% up to £1m, 50% above £1m |
Tax Impact (e.g., £2m asset) | £0 (100% relief) | £200,000 (40% on £500,000) |
Source: HMRC, Budget 2024 IHT Reforms |
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Can You Use Trusts to Protect Assets?
So, the question is: are trusts still worth it? Absolutely, but they’re trickier now. Under the new residence-based rules, trusts with non-UK assets are only IHT-free if the settlor isn’t a long-term UK resident at the time of a chargeable event (e.g., death or 10-year trust anniversary). Setting up a trust before you hit 10 years of UK residency can lock in IHT-free status for non-UK assets, even if you later become a long-term resident.
For example, consider Tegan, a US national who moved to the UK in 2020. In 2025, with five years of UK residency, she sets up an offshore trust with £2 million in US stocks. As she’s not yet a long-term resident, the trust is an excluded property trust (EPT), and those stocks stay IHT-free, even if she stays in the UK past 2030. If she sets up the trust after hitting 10 years, the assets are taxable while she’s a long-term resident. Timing and residency planning are critical here.
Step-by-Step Guide: Creating a Personalised IHT Plan
Here’s a practical roadmap to get you started:
Assess Your Residency Status: Use the Statutory Residence Test (SRT) on GOV.UK to confirm if you’re a long-term UK resident (10+ years in the last 20). Track your UK and non-UK days annually.
Value Your Estate: List all assets (UK and worldwide), including property, investments, and business interests. Get professional valuations for complex assets like unquoted shares.
Maximise Nil-Rate Bands: Ensure your will directs your home to descendants to claim the £500,000 RNRB.
Explore Lifetime Gifting: Gift assets like cash, property, or business shares to reduce your estate’s value. Use annual exemptions (£3,000/year) and PETs, surviving seven years for full IHT exemption.
Consider Trusts: Set up a discretionary or excluded property trust before reaching long-term resident status to protect non-UK assets. Seek specialist advice to avoid exit charges.
Review Business Reliefs: For business owners, gift qualifying assets early to maximize BPR before the £1 million cap in April 2026. Ensure the business meets HMRC’s trading criteria.
Plan Your Will: Structure your will to transfer unused NRB and RNRB to your spouse or descendants, potentially doubling your tax-free allowance to £1 million.
Monitor Residency Changes: If planning to leave the UK, time your exit before April 2025 to benefit from transitional rules, limiting the IHT tail period to three years.
Seek Professional Advice: Consult a tax adviser or estate planner to tailor your plan to your residency status, asset mix, and family needs. Costs can be high, but savings are often higher.
Regularly Review Your Plan: Revisit your IHT strategy every 3–5 years or after major life events (e.g., moving abroad, selling a business) to ensure it aligns with current rules.
Keep Records: Document all gifts, trust contributions, and residency details for HMRC compliance and to avoid disputes after death.
This step-by-step approach ensures your IHT plan is robust and adaptable. For instance, if you’re a dual resident (e.g., UK and France), a double tax treaty might reduce your IHT liability—consult an expert to navigate this.
What If You’re Planning to Leave the UK?
Now, here’s a bold move: leaving the UK to shed long-term resident status. If you’re not a long-term resident (under 10 years in the last 20), moving abroad before April 2025 could limit your IHT tail period to three years under transitional rules. For example, Arlo, a non-dom with £4 million in offshore investments, moves to Portugal in March 2025. By proving non-UK domicile status by 30 October 2024, his non-UK assets avoid IHT after three years, not 10. But beware—emigration must be genuine, with minimal UK ties (e.g., fewer than 16 days in the UK per tax year). The SRT is strict, so plan carefully with a tax adviser.
This part has armed you with strategies to tackle the new IHT rules head-on. Next, we’ll wrap up with a summary of the most critical points to keep your planning on track.
Key Takeaways for Navigating the New IHT Rules
Right, you’ve got a solid grasp of the new residence-based inheritance tax (IHT) rules and practical strategies to minimize your tax bill. Let’s tie it all together with a clear, concise summary of the most critical points. Whether you’re a UK taxpayer with a family home or a business owner with international assets, these takeaways will help you plan effectively and stay ahead of the changes starting April 2025. Below are the 10 most important points, each distilled into a single sentence for clarity, followed by deeper insights where needed.
What Are the Must-Know Points for IHT Planning?
The UK’s IHT system switches to residence-based rules from 6 April 2025, taxing worldwide assets of long-term UK residents (10+ years in the last 20).
This shift replaces the domicile-based system, making your tax residency the key determinant of IHT liability, so track your residency status carefully using the Statutory Residence Test.
If you’re a long-term UK resident, your worldwide assets are subject to IHT at 40% above the £325,000 nil-rate band (plus £175,000 residence nil-rate band for homes left to descendants).
For example, an estate worth £2 million could face a £600,000 tax bill if no reliefs apply, so early planning is crucial.
Leaving the UK can reduce IHT on non-UK assets, but a tail period of 3–10 years applies, depending on your years of UK residency.
Moving abroad before April 2025 could limit this to three years under transitional rules, as seen in Arlo’s case, who saved millions by relocating to Portugal.
Lifetime gifting can slash your IHT liability, with potentially exempt transfers (PETs) becoming tax-free if you survive seven years.
Elowen’s £500,000 gift to her daughter, for instance, could save £200,000 in IHT, but you must avoid retaining benefits from gifted assets.
Business property relief (BPR) and agricultural property relief (APR) are capped at 100% for the first £1 million from April 2026, with 50% relief above that.
Jago’s manufacturing business, valued at £2 million, will face £200,000 in IHT post-2026 unless he gifts assets early.
Trusts with non-UK assets are IHT-free only if the settlor isn’t a long-term UK resident at the time of a chargeable event, like death or a 10-year anniversary.
Tegan’s early trust setup in 2025 protected her US stocks, showing the value of timing trusts before hitting 10 years of residency.
The residence nil-rate band (RNRB) tapers for estates over £2 million, disappearing at £2.7 million, so gifting to reduce estate value is key.
A £300,000 gift could preserve the full £175,000 RNRB, saving £70,000 in tax, as discussed earlier.
Annual exemptions (£3,000 per person) and small gift exemptions (£250 per recipient) offer low-risk ways to reduce your estate’s value.
These are perfect for regular, small-scale gifting to chip away at your taxable estate without complex planning.
Transitional rules allow non-doms who leave the UK before April 2025 and weren’t deemed domiciled by 30 October 2024 to limit their IHT tail to three years.
This is a narrow window, so act fast if you’re planning an exit, as Priya did to protect her Indian investments.
A personalized IHT plan, reviewed every 3–5 years with a tax adviser, ensures you maximize reliefs and adapt to rule changes.
Regular updates, like those in the step-by-step guide, keep your strategy aligned with your residency, assets, and family goals.
How Can You Stay Ahead of the Curve?
Now, don’t just sit on this info—act on it. Start by assessing your residency status and estate value today. If you’re nearing 10 years of UK residency, consider setting up trusts or making gifts before April 2025 to lock in tax savings. Business owners should review BPR eligibility and plan transfers before the £1 million cap hits in 2026. And if you’re thinking of leaving the UK, get advice on the Statutory Residence Test to avoid accidental tax triggers.
Table 3: Key IHT Allowances and Rates (2025/26)
Allowance/Rate | Details | Source |
Nil-Rate Band (NRB) | £325,000 per person, transferable to spouse | HMRC IHT Overview |
Residence Nil-Rate Band (RNRB) | £175,000 for homes left to descendants, tapers above £2m | GOV.UK RNRB Guide |
IHT Rate | 40% on taxable estate value | HMRC Budget 2024 |
Gift Exemptions | £3,000 annual, £250 small gifts, wedding gifts up to £5,000 | GOV.UK Gift Rules |
For example, consider Morwenna, a dual UK-US resident with a £3 million estate split between London property and US shares. By gifting £500,000 to her kids in 2025 and setting up an offshore trust before hitting long-term resident status, she could save over £1 million in IHT, factoring in double tax treaty reliefs. The key? Early, tailored action with expert advice.
This summary gives you the tools to take control of your IHT planning. Keep these points handy, revisit your strategy regularly, and consult a tax professional to ensure your plan is watertight. The new rules are complex, but with the right moves, you can protect your wealth for the next generation.
FAQs
Q1: What is the new residence-based inheritance tax system effective from April 2025?
A1: The residence-based inheritance tax (IHT) system replaces the domicile-based system. From April 2025, individuals classified as long-term UK residents (resident for 10 out of the last 20 tax years) will be subject to IHT on their worldwide assets, while non-long-term residents will only be taxed on UK-situated assets.
Q2: Who qualifies as a long-term UK resident for inheritance tax purposes?
A2: An individual is considered a long-term UK resident if they have been tax resident in the UK for at least 10 out of the 20 tax years preceding the chargeable event, such as death or a lifetime transfer. For those under 20, the test is modified to 50% of tax years since birth.
Q3: How does the residence-based system affect non-UK domiciled individuals?
A3: Non-UK domiciled individuals will no longer rely on domicile status for IHT. Their liability for IHT on non-UK assets depends on whether they meet the long-term resident criteria, bringing their worldwide assets into the scope of IHT if they qualify.
Q4: What are the transitional rules for non-UK domiciled individuals in 2025-26?
A4: For non-UK domiciled individuals who are not UK residents in the 2025-26 tax year and were not deemed domiciled by April 2025, no IHT tail applies. Those deemed domiciled will face a three-year IHT tail, regardless of prior UK residence duration.
Q5: What is the IHT tail period under the new rules?
A5: The IHT tail period applies to long-term residents who leave the UK, subjecting their worldwide assets to IHT for up to 10 years after departure. The duration varies from 3 to 10 years, depending on the number of years they were UK resident (e.g., 3 years for 10-13 years of residence).
Q6: How are UK-situated assets treated under the new IHT rules?
A6: UK-situated assets remain subject to IHT for all individuals, regardless of residence status, as was the case under the previous domicile-based system.
Q7: What happens to non-UK assets held in trusts after April 2025?
A7: Non-UK assets in trusts will be subject to IHT if the settlor is a long-term UK resident at the time of a chargeable event, such as death or a trust’s 10-year anniversary. For trusts created before April 2025, the settlor’s domicile at the time of asset transfer determines excluded property status.
Q8: Can lifetime gifts help reduce IHT liability under the new rules?
A8: Lifetime gifts of non-UK assets made when an individual is not a long-term resident remain outside IHT scope, even if the donor dies within seven years as a long-term resident. Gifts of UK assets or by long-term residents may be taxable if the donor dies within seven years.
Q9: How do the new rules affect agricultural property relief (APR) and business property relief (BPR)?
A9: From April 2026, APR and BPR will be capped at £1 million combined value. Assets above this threshold receive 50% relief, resulting in an effective IHT rate of 20% on excess personally held assets and 3% for trust-held assets.
Q10: Are there exemptions for transfers between spouses under the new IHT rules?
A10: Transfers between spouses or civil partners remain exempt from IHT, provided the recipient spouse is a long-term UK resident or elects to be treated as one for IHT purposes.
Q11: What is the Temporary Repatriation Facility (TRF) for non-doms?
A11: The TRF, available from April 2025 for three years, allows non-doms to bring pre-April 2025 foreign income and gains to the UK at a reduced tax rate, aiding in managing tax liabilities during the transition.
Q12: How does the residence-based system impact UK nationals living abroad?
A12: UK nationals living abroad for 10 consecutive tax years will no longer be subject to IHT on non-UK assets, as the new rules eliminate domicile as a factor, potentially benefiting “Brits abroad” with careful planning.
Q13: What is the nil-rate band for IHT in 2025-26?
A13: The nil-rate band remains at £325,000 per individual, with no changes announced until at least April 2030. This allowance applies to all assets before IHT is charged.
Q14: How does the residence nil-rate band (RNRB) work in 2025-26?
A14: The RNRB, set at £175,000 per individual, applies when passing a main residence to direct descendants. It tapers off for estates exceeding £2 million, reducing by £1 for every £2 over the threshold.
Q15: Can married couples combine their IHT allowances?
A15: Married couples or civil partners can transfer unused nil-rate bands and RNRBs, potentially allowing up to £1 million (£325,000 + £175,000 per spouse) to be passed tax-free to direct descendants.
Q16: How are trusts affected by the new IHT residence-based rules?
A16: For trusts created after April 2025, non-UK assets will be subject to IHT if the settlor is a long-term resident at the time of a chargeable event. Trusts created before this date retain excluded property status based on the settlor’s domicile at the time of asset transfer.
Q17: What happens if a long-term resident leaves the UK before April 2025?
A17: If a long-term resident leaves the UK before April 2025 and is non-UK resident in 2025-26, transitional rules may limit or eliminate the IHT tail, depending on their domicile status as of October 2024.
Q18: Are there strategies to mitigate IHT under the new rules?
A18: Strategies include making lifetime gifts of non-UK assets before becoming a long-term resident, reviewing trust structures, and planning the timing of UK residency to minimise the IHT tail period.
Q19: How does the new system affect foreign currency UK bank accounts?
A19: From April 2025, foreign currency UK bank accounts will only be excluded from IHT if held by an individual who is not a long-term UK resident and is non-UK resident at the time of death.
Q20: What should individuals do to prepare for the IHT changes?
A20: Individuals should review their residence history, assess trust structures, consider lifetime gifting strategies, and consult with tax advisors to optimise planning under the new residence-based IHT rules.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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