If you’ve been living overseas for years but are now considering a return to the UK, the recent budget changes to Inheritance Tax (IHT) could significantly affect your financial planning.
From April 2025, the UK government is introducing new rules that shift the focus of IHT liability from your domicile status to your residency history.
Here’s what you need to know.
Current IHT Rules: How Things Work Now
Under the current rules, your IHT liability depends on your domicile status and the location of your assets:
- UK Domiciled Individuals:
- Liable for IHT on their worldwide assets, regardless of where they live.
- Non-UK Domiciled Individuals (Non-Doms):
- Liable for IHT only on UK-based assets, such as UK property.
- After being UK tax-resident for 15 of the past 20 years, they are treated as deemed domiciled, and their worldwide assets fall within the IHT scope.
What’s Changing From April 2025?
The Autumn Budget introduces a residence-based IHT test, replacing domicile as the primary factor.
Here’s how the new rules will work:
- Long-Term Residents and IHT:
- If you have been UK-resident for 10 out of the last 20 tax years, you’ll be treated as a long-term resident, similar to how deemed domicile works today.
- Long-term residents will be liable for IHT on their worldwide assets, even if they are not UK-domiciled.
- Resetting Your IHT Status:
- Once you’re classed as a long-term resident for IHT, you’ll remain liable for IHT on worldwide assets until you’ve been non-UK resident for a certain period:
- 10 years if you lived in the UK for 20+ years
- 3 years if you were UK-resident for 10–13 years
- 1 additional year for each year beyond 13, up to 10 years total
- Once you’re classed as a long-term resident for IHT, you’ll remain liable for IHT on worldwide assets until you’ve been non-UK resident for a certain period:
- Split Years and Double Tax Treaties:
- If you are a resident in both the UK and another country, you could still be treated as UK-resident under the Statutory Residence Test, making your global assets subject to IHT.
How This Affects Returning Expats
For British expats returning to the UK after years abroad, these changes could have a profound impact on your financial situation.
Let’s break it down:
1. Worldwide Assets Liable for IHT
If you return to the UK after April 2025, you will be liable for IHT on all your global assets if you meet the 10-year residence test.
I.e., if you’ve been UK-resident for 10 out of the last 20 tax years before a “chargeable event” (like death or transferring assets into a trust), you’ll be treated as a “long-term resident” and face IHT on your worldwide assets.
2. No Grace Period
Your past 20 years of UK residency history will be assessed as soon as you return. There’s no transition or adjustment period to protect your foreign assets.
3. Extended Exit Period
If you move back to the UK but decide to leave again, your worldwide assets will remain within IHT scope for up to 10 years after you leave.
The more years you’ve spent as a UK resident, the longer this “exit tail” applies.
4. Ten Year IHT Holiday
If you have been outside the UK for 20 or more years and return after April 2025, you can stay for 10 years before your worldwide assets become subject to IHT.
What Should You Do if You’re Considering a Return to the UK?
Returning to the UK doesn’t mean you have to accept a large IHT bill.
With careful planning, you can take steps to mitigate the impact of the new rules.
1. Review Your Domicile and Residency History
Understand whether you currently meet the 10 out of 20-year residency test.
If not, you may still have time to plan before returning to the UK.
If you’ve already been a UK resident for 10 years or more out of the last 20, your worldwide assets will immediately fall into scope after 5th April 2025.
2. Plan for Lifetime Gifting
Consider making lifetime gifts to mitigate IHT.
Using gift allowances to reduce IHT: Six tips on using gifts to reduce inheritance tax
3. Assess the Timing of Your Return
If you’ve been living overseas for many years and don’t meet the 10-year residency threshold, you might want to delay your return to maintain your current IHT advantages.
Timing can be a critical factor in reducing your tax exposure.
4. Revisit Your Will and Estate Planning
Returning to the UK means your global estate plan may need to be updated to reflect the new rules.
Reviewing trusts, excluded property, and other strategies can help limit unnecessary tax liabilities.
Case Study: How the New IHT Rules Impact Jonathan, a Retired UK-Domiciled Expat in Spain
To understand the impact of the recent inheritance tax (IHT) changes, let’s look at Jonathan’s situation.
Background on Jonathan
- Domicile: UK-domiciled (has not changed domicile since moving abroad)
- Residence: Spain, where he has lived for the past 20 years
- Health: Recently declining, prompting thoughts of returning to the UK to be closer to family and access healthcare
- Tax Status: UK-domiciled, non-UK resident
Current IHT Treatment (Before 6 April 2025)
Under the current IHT rules, Jonathan’s estate is subject to IHT on his global assets due to his retained UK domicile.
How the New Rules Affect Jonathan’s Potential Return to the UK
After the 6th of April 2025, if Jonathan stays in Spain, he will not be classed as long-term UK resident and his overseas assets will no longer be on the hook for UK IHT.
If he returns to the UK after this date, he will be able to stay for 10 years before his overseas assets will be liable for UK IHT.
Both scenarios put Jonathan in a considerably more favourable position than the one he is in under the current domicile-based IHT rules.
Bottom Line: Look Before You Leap
For British expats, the new IHT rules could drastically alter the tax landscape upon returning to the UK.
By planning ahead, you can ensure your global assets are protected and minimise your IHT liability.
Whether it’s through careful timing, gifting, or revisiting your estate plan, it’s essential to take professional advice before making the move.
Returning to the UK is a significant decision, but with the right strategy, you can safeguard your financial legacy.
Speak to a cross-border financial adviser to navigate these complex changes and make informed decisions about your future.
Further Reading
UK Budget 2024 – What does it mean for expats?
Navigating the FIG Regime: Essential Insights on the UK’s Latest Non-Dom Tax Changes
New UK Inheritance Tax Rules for Non-Doms: What You Need to Know for 2025
