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Cross-Border Estate Planning: Residence-Based Inheritance Tax Policy for Non-Domiciled Individuals

· 19 min

Executive Summary

The Finance Act 2025 enacted the most significant structural reform to UK inheritance tax since deemed domicile was introduced in 2017, replacing domicile with long-term UK residence as the connecting factor from 6 April 2025. Individuals become subject to UK inheritance tax on worldwide assets after 10 years of UK residence within the preceding 20 tax years, with graduated tail provisions of 3 to 10 years maintaining exposure after departure. This policy analysis examines cross-border implications for international wealth managers: double taxation convention interactions where treaties reference domicile concepts no longer used domestically, transitional protections for individuals non-domiciled on 30 October 2024, restructured reporting obligations requiring up to 39 years of residence documentation, and the critical asymmetry between the 4-year Foreign Income and Gains regime and the 10-year inheritance tax threshold.

1. Policy Framework: From Domicile to Residence

Historical Context and Rationale for Reform

UK inheritance tax has historically employed domicile as the connecting factor determining worldwide tax exposure. Under common law domicile principles, an individual's domicile of origin—typically the father's domicile at birth—persisted unless displaced by the acquisition of a domicile of choice through both physical presence and intention to remain permanently or indefinitely. This created significant evidential complexity, as determining intentions regarding permanent residence frequently required analysis of subjective factors including family ties, property ownership, and social connections.

The Finance (No. 2) Act 2017 introduced deemed domicile rules, treating individuals as UK domiciled for inheritance tax purposes after 15 out of 20 tax years of UK residence, while preserving the excluded property status of non-UK assets settled before deemed domicile arose.1 This reform addressed concerns that long-term UK residents could avoid worldwide inheritance tax exposure indefinitely by maintaining domicile of origin through careful planning.

The Autumn Budget 2024 announced the abolition of the non-domicile regime entirely, replacing domicile-based inheritance tax treatment with a residence-based system. The policy rationale, articulated in HM Treasury's published summary, centred on addressing unfairness in the tax system so that everyone who is long-term resident in the UK pays their taxes in the UK, while creating a more internationally competitive framework focused on attracting talent and investment.2 The shift to a purely mechanical residence test eliminates uncertainty surrounding domicile determinations while extending UK taxing rights to a broader population of internationally mobile individuals.

The Long-Term UK Resident Test

The Finance Act 2025, which received Royal Assent on 20 March 2025, enacted the residence-based inheritance tax regime from 6 April 2025.3 Under the new framework, an individual is a long-term UK resident (LTUR) where they have been UK tax resident for at least 10 of the 20 tax years immediately preceding the tax year in which the chargeable event arises.4

Residence is determined by the Statutory Residence Test under Finance Act 2013, which provides objective criteria based on day counts, connection factors, and work patterns. Split-year treatment counts as a full year of UK residence for LTUR purposes—significant for internationally mobile individuals whose arrival or departure mid-year might otherwise suggest reduced connection to the UK.5 An individual arriving on 1 January and qualifying for split-year treatment nonetheless accumulates a full qualifying year toward the LTUR threshold.

The test applies irrespective of common law domicile. An individual domiciled in the United States, France, or any other jurisdiction who accumulates 10 years of UK residence within the 20-year window becomes subject to UK inheritance tax on worldwide assets, including non-UK situs property. This represents a fundamental shift from the previous regime, where domicile of origin could provide indefinite protection against worldwide estate taxation regardless of residence duration.

Comparison with Former Deemed Domicile Rules

The practical effect of the shift from 15/20 to 10/20 years is a five-year acceleration of worldwide inheritance tax exposure. An individual arriving in the UK on 6 April 2025 will become an LTUR from 6 April 2035, compared with 6 April 2040 under the former deemed domicile rules. For clients already resident, the transition may immediately accelerate exposure depending on residence history.

More significantly, the new regime creates a mechanical test that removes subjectivity inherent in domicile determinations. Common law domicile required analysis of intentions regarding permanent residence—often a matter of considerable evidential complexity occasionally resulting in litigation. The residence-based test requires only counting qualifying years against the 20-year window, providing greater certainty but removing planning flexibility that domicile considerations previously afforded.

2. The Tail Provision and Exit Planning

Graduated Post-Departure Exposure

Where an individual meets the LTUR test and subsequently becomes non-UK resident, they remain within worldwide inheritance tax scope for a graduated "tail period" determined by prior residence duration:6

Prior UK Residence (of last 20 years) Tail Period (years in IHT scope after departure)
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

The tail period commences from the first complete tax year of non-UK residence. An individual UK resident for 15 of the preceding 20 years who departed on 1 January 2026 would complete their first full tax year of non-residence on 5 April 2027, with their tail period expiring on 5 April 2032. During this period, worldwide inheritance tax exposure continues, including on assets acquired after departure.

The Ten-Year Reset Mechanism

The LTUR status resets after 10 consecutive years of non-UK residence. At that point, the individual is no longer treated as LTUR even if they subsequently return—they would need to accumulate 10 fresh qualifying years before worldwide inheritance tax exposure resumed.7

This reset mechanism creates planning opportunities for clients willing to commit to extended periods outside the UK, but the 10-year duration represents a substantial commitment. Under the former deemed domicile rules, four years of non-residence would break deemed domicile status; the new regime more than doubles this requirement. The extended reset period reflects policy intention to prevent individuals from briefly interrupting UK residence to restart the clock.

Illustrative Scenarios: Exit Planning Considerations

Scenario 1: Long-Term Resident Departure

Consider an internationally mobile client who arrived in 2010 and has been continuously UK resident since. By 2025, they have accumulated 15 qualifying years and meet the LTUR test. Should they depart in 2026:

  • Tail period: 5 years (corresponding to 15 years of prior residence)
  • Worldwide inheritance tax exposure: Continues until 6 April 2032
  • Full reset: Requires non-UK residence until 6 April 2036

If the client returns in 2030—before completing 10 consecutive years of non-residence—they would immediately re-enter LTUR status and resume accumulating qualifying years.

Scenario 2: Near-Threshold Client

A client UK resident for 8 years faces different considerations. Departure before reaching 10 qualifying years would avoid triggering the LTUR test entirely, meaning no worldwide inheritance tax exposure and no tail period. However, remaining for two additional years triggers a 3-year tail period upon departure. This cliff-edge effect at the 10-year threshold creates planning urgency for clients approaching but not yet meeting the LTUR test.

3. Transitional Provisions for Individual Non-Domiciled Individuals

The 30 October 2024 Threshold Date

Individuals who were not domiciled or deemed domiciled in the UK on 30 October 2024 benefit from transitional relief if they become non-UK resident from 2025-26 onwards. These individuals are assessed under the former 15/20-year deemed domicile test rather than the new 10/20-year LTUR test, provided they meet specific transitional conditions.8

The effect is significant: an individual non-domiciled on 30 October 2024 who becomes non-UK resident in 2025-26 will not be treated as a long-term UK resident, even if UK resident for 10 or more of the preceding 20 tax years. The transitional protection effectively exempts this cohort from the new LTUR framework for departure purposes, provided they leave before the new regime applies substantively.

Deemed Domiciled Individuals and the Three-Year Tail

For individuals who were deemed domiciled on 30 October 2024 under the former 15/20-year test, transitional rules impose an approximately three-year tail period following departure. If a deemed domiciled individual becomes non-UK resident in 2025-26, they remain within UK inheritance tax scope until the start of their fourth tax year of non-residence—shorter than the standard LTUR framework for equivalent residence history.9

This transitional tail represents a compromise between the former deemed domicile rules (which imposed a four-year tail) and the new graduated LTUR tail provisions. Individuals planning departure who were deemed domiciled on 30 October 2024 should factor this limited-duration exposure into estate planning.

Consequences of Return to UK Residence

The transitional protections are one-directional: they apply on departure but not on return. An individual non-domiciled on 30 October 2024 who departed in 2025-26 to benefit from transitional relief and subsequently returns to UK residence in 2026-27 or later will immediately be subject to the new 10/20-year LTUR test.10

Returning individuals cannot benefit from transitional protections a second time. Their residence years prior to departure count toward the new LTUR threshold, potentially resulting in immediate LTUR status upon return. International wealth managers should counsel clients that transitional departure represents a one-way door: benefits crystallise only for those who remain outside the UK long enough to fully reset their position.

Distinction from Trust Transitional Protections

Individual-level transitional provisions operate independently from trust transitional protections discussed in Section 5. An individual benefiting from individual transitional provisions may also hold interests in trusts that benefit from the separate GBP 5 million charge cap on excluded property. The two regimes serve different purposes: individual transitional provisions relate to the deceased's or transferor's personal LTUR status, while trust transitional provisions relate to inheritance tax treatment of settlement property.

4. Double Taxation Convention Analysis

The Treaty Network and Domicile References

The UK maintains inheritance tax double taxation conventions with 10 jurisdictions: the United States, Ireland, South Africa, France, the Netherlands, Sweden, Switzerland, Italy, India, and Pakistan.11 These conventions were drafted when domicile was the UK's inheritance tax connecting factor and reference "domicile" in their operative provisions.

The Finance Act 2025 did not amend existing conventions. Under HMRC guidance, domicile remains relevant where a valid convention references domicile and an individual claims treaty protection based on domicile in the treaty partner jurisdiction.12 However, this creates fundamental misalignment between the UK's domestic tax treatment—now based on residence—and the treaty framework—still based on domicile.

United States-United Kingdom Treaty Analysis

The US-UK Estate Tax Convention (1979) provides that US citizens and residents domiciled in the United States under treaty definitions may claim relief from UK inheritance tax on non-UK situs assets.13 The treaty defines domicile by reference to each country's internal law, with a tie-breaker based on "permanent home" and then "habitual abode."

For US persons who become LTUR while remaining in the UK, the treaty provides limited protection. A US citizen UK resident for 12 years will meet the LTUR test and face UK inheritance tax on worldwide assets. If they can demonstrate US domicile under the treaty definition—requiring their permanent home is in the United States—they may claim treaty relief on non-UK assets. However, long-term UK residents are unlikely to satisfy these conditions, as extended UK presence typically indicates a permanent home in the UK under the treaty test. Treaty relief becomes progressively less available as UK residence accumulates.

France-United Kingdom and Ireland-United Kingdom Treaties

The France-UK Convention on Succession Duties (1963) similarly references domicile concepts that no longer align with UK domestic tax treatment. French nationals living in the UK who retain French domicile under the treaty may claim relief, but the interaction between French residence-based succession taxes and UK residence-based inheritance tax creates coordination challenges.

The Ireland-UK Agreement (1978) presents particular complexity given geographic proximity and frequency of cross-border movement. Irish nationals living in the UK who accumulate 10 qualifying years become LTUR regardless of retained Irish domicile. The treaty provides limited relief, as its domicile tie-breaker provisions do not address the scenario where UK taxing rights arise from residence rather than domicile.14 Given the Common Travel Area and substantial cross-border population movement, this misalignment affects a significant number of individuals.

Treaty Override Risks and Reform Considerations

The misalignment between the UK's domestic residence-based regime and its domicile-based treaty network creates potential treaty override issues. Where domestic legislation imposes tax that would be relieved under a convention, courts must determine whether Parliament intended to override the treaty. The Finance Act 2025 does not contain express treaty override provisions, but the practical effect may be equivalent. Advisors should anticipate HMRC taking a robust position on the interaction between domestic rules and treaty protections.

No formal renegotiation announcements have been made, and any treaty revision would require bilateral agreement with partner jurisdictions that may have limited incentive to expand UK taxing rights. The current treaty network may therefore remain misaligned for an extended period.

5. Trust Structures Under the New Regime

Dynamic Excluded Property Determination

From 6 April 2025, the excluded property status of non-UK assets in a settlement is determined dynamically by whether the settlor is LTUR at the time of the inheritance tax charge, rather than being fixed by the settlor's domicile at settlement.15 This represents a fundamental change from the previous regime, where assets settled before deemed domicile arose retained excluded property status indefinitely.

Under the new framework, non-UK trust property becomes excluded property (outside inheritance tax scope) when the settlor loses LTUR status—but this triggers an exit charge. Conversely, property that was excluded when settled may lose excluded status if the settlor subsequently becomes LTUR. The settlor's residence history therefore affects the trust's tax treatment on an ongoing basis.

The GBP 5 Million Charge Cap

For property that was excluded property comprised in a settlement immediately before 30 October 2024, transitional protections apply subject to specific conditions:16

  • The property must have been foreign property (or authorised unit trust/OEIC holdings) at 30 October 2024
  • The property must remain foreign at the time of the relevant charge
  • New additions to settlements after 30 October 2024 cannot benefit from transitional protection

A cap of GBP 5 million on relevant property inheritance tax charges applies per trust over each 10-year cycle for property meeting these conditions. This cap does not apply to death charges, new trusts created from 30 October 2024, or UK-situs assets. The cap operates cumulatively across the 10-year cycle.

The GBP 5 million cap operates per trust, potentially creating planning considerations for structures involving multiple settlements. Where a settlor established multiple offshore trusts before 30 October 2024, each trust benefits from its own cap.

Settlor LTUR Monitoring Requirements

The dynamic nature of excluded property determination creates ongoing monitoring obligations for trustees and advisors. The settlor's LTUR status must be assessed at each potential charge point—including 10-year anniversary charges and exit charges—requiring systematic tracking of residence history across potentially several decades.

For trusts with multiple settlors, each settlor's LTUR status must be monitored separately in proportion to their contribution. The compliance burden is significantly greater than under the previous domicile-based regime. Trustees should implement formal processes for obtaining annual residence confirmations from settlors.

6. Coordinating the Foreign Income and Gains Regime with Inheritance Tax Planning

The Four-Year FIG Regime

From 6 April 2025, the remittance basis was replaced by the four-year Foreign Income and Gains (FIG) regime. Eligible individuals—those non-UK resident for the previous 10 consecutive years—may claim relief from UK tax on foreign income and gains for their first four tax years of UK residence.17

The FIG regime provides substantial income tax and capital gains tax benefits for new UK arrivals. Qualifying individuals pay no UK tax on foreign income and gains regardless of whether remitted to the UK, subject to making an annual claim.

Critical Asymmetry with the Inheritance Tax Clock

The critical point for cross-border estate planning is that the FIG regime provides income tax and capital gains tax relief only—it does not affect the inheritance tax clock. An individual arriving in the UK and claiming FIG relief for four years is still accumulating qualifying years toward the 10-year LTUR threshold.18

By Year 4, the individual has accumulated four qualifying years. By Year 10, they become fully within scope for UK inheritance tax on worldwide assets, regardless of FIG claim history. The income tax protection offered during the initial arrival period provides no estate planning benefit whatsoever.

This asymmetry requires coordinated planning from Year 1 of UK residence. Clients should structure estate and trust arrangements during early residence years while inheritance tax exposure on non-UK assets remains limited. Establishing offshore structures, transferring assets to existing non-UK trusts, or making substantial lifetime gifts may be more tax-efficient when completed before LTUR status arises.

Temporary Repatriation Facility Interaction

The Temporary Repatriation Facility (TRF) allows former remittance basis users to designate pre-April 2025 foreign income and gains and bring them to the UK at reduced rates: 12% for 2025-26 and 2026-27, and 15% for 2027-28.19

While the TRF addresses income tax on accumulated foreign income and gains, repatriating funds to the UK may affect estate planning by increasing UK-situs assets within the inheritance tax net. Clients considering TRF designations should assess whether the income tax benefit outweighs the estate planning cost, particularly where approaching or meeting the LTUR threshold.

7. Reporting Obligations and Compliance

The New Schedule IHT401a

For deaths on or after 6 April 2025, executors must complete updated reporting schedules documenting residence history. Schedule IHT401 has been updated for deaths where a double taxation convention applies, while Schedule IHT401a applies for deaths where the deceased was not a long-term UK resident.20

The new schedules require executors to provide HMRC with details of tax residence for up to 39 years before death—comprising the 20-year look-back for the LTUR test plus potential additional years for tail provision calculation and reset verification.21

Cross-Border Information Gathering Challenges

The 39-year documentation requirement creates significant compliance burden. Executors may need to obtain residence evidence from multiple jurisdictions, potentially requiring historical tax returns, immigration records, employment records, property records, and utility bills.

For individuals with complex international histories—including periods in jurisdictions without formal residence registration systems—establishing a complete residence record may prove extremely challenging. International wealth managers should advise clients to maintain comprehensive residence documentation during their lifetime.

Executor Liability Considerations

Executors who file incorrect returns regarding LTUR status risk personal liability for underpaid inheritance tax plus interest and penalties. Where residence history is uncertain, executors should consider protective claims or disclosures to HMRC documenting available evidence and assumptions made.

8. Comparative International Positioning

Competing Wealth Jurisdictions

The UK's shift to residence-based inheritance tax affects its competitive position for internationally mobile ultra-high-net-worth individuals. Several jurisdictions offer more favourable estate tax treatment:

  • United Arab Emirates, Singapore, Hong Kong: No inheritance tax
  • Portugal: No inheritance tax on non-residents; limited scope for residents
  • Italy: Favourable "res non-dom" regime with flat tax option on foreign income
  • Switzerland: Cantonal variation; generally favourable for foreign nationals

Research from Henley & Partners indicates the UK experienced a net loss of 10,800 millionaires in 2024, a 157% increase compared with 4,200 departures in 2023, though the methodology underlying these figures has been subject to academic scrutiny and migration of less than 1% may not constitute an "exodus."22 Tax reforms are cited as a contributing factor, though correlation does not establish causation.

Client Retention Considerations

International wealth managers advising clients considering UK residence must present a balanced analysis. The UK offers substantial non-tax benefits—access to world-class education, healthcare, financial services infrastructure, political stability, and legal certainty—that may outweigh estate tax considerations.

However, the accelerated timeline to worldwide inheritance tax exposure (10 years versus the former 15 years) and the extended tail provision (up to 10 years versus the former 4 years) represent material planning constraints requiring explicit client communication.

Conclusion

The Finance Act 2025 residence-based inheritance tax regime represents a fundamental restructuring of UK estate taxation for internationally mobile individuals. The replacement of domicile with the 10/20-year long-term UK resident test creates mechanical certainty but extends the UK's taxing reach to individuals who would have remained outside worldwide inheritance tax scope under the previous system.

International wealth managers must recalibrate their advisory frameworks to address: the graduated tail provision creating new exit planning variables; transitional provisions affording limited protection to individuals non-domiciled on 30 October 2024; the misalignment between the UK's residence-based regime and its domicile-based treaty network; the dynamic excluded property determination for trusts requiring ongoing settlor status monitoring; and the asymmetry between FIG relief and inheritance tax exposure requiring coordinated planning from Year 1 of UK residence.

The compliance burden—particularly the 39-year residence documentation requirement—demands systematic record-keeping throughout clients' international careers. Early engagement with estate planning remains essential given the inexorable progression of the residence clock from the first day of UK arrival.

CPD Declaration

Estimated Reading Time: 25 minutes Technical Level: Advanced Practice Areas: International tax planning, estate planning, cross-border wealth management, trust administration

Learning Objectives

Upon completing this article, practitioners will be able to:

  1. Explain the long-term UK resident test mechanics and calculate tail provision duration for clients with varying residence histories
  2. Evaluate the interaction between UK inheritance tax double taxation conventions and the new residence-based regime for clients domiciled in treaty partner jurisdictions
  3. Distinguish between transitional protections available to non-domiciled individuals who were non-domiciled on 30 October 2024 and those arriving after that date
  4. Apply the four-year Foreign Income and Gains regime in coordination with the 10-year LTUR threshold when advising new UK arrivals on estate planning

SRA Competency Mapping

  • A2: Maintain the level of competence and legal knowledge needed to practise effectively
  • B4: Draw on a sufficient and sound knowledge of relevant legal principles

Reflective Questions

  1. How would the introduction of the residence-based inheritance tax regime affect advice provided to clients considering relocation to the UK for employment or business purposes?
  2. What additional due diligence steps should be implemented when advising clients with assets in jurisdictions covered by UK inheritance tax double taxation conventions?
  3. How might the asymmetry between FIG income tax relief and inheritance tax exposure influence the sequencing of estate planning advice for new UK arrivals?

Professional Disclaimer

The information presented reflects the regulatory and legislative position as of 2026-02-06. Regulations, tax rules, and professional guidance are subject to change. Readers should independently verify all information before acting and seek advice from appropriately qualified solicitors, financial advisors, or other professionals for their specific circumstances.

Neither WUHLD nor the author accepts liability for any actions taken or decisions made based on the content of this article. Professional readers are reminded of their own regulatory obligations and duty of care to their clients.

Footnotes

Footnotes

  1. Finance (No. 2) Act 2017, section 30. https://www.legislation.gov.uk/ukpga/2017/32/section/30 ↩

  2. GOV.UK, Changes to the taxation of non-UK domiciled individuals (October 2024). https://www.gov.uk/government/publications/2024-non-uk-domiciled-individuals-policy-summary/changes-to-the-taxation-of-non-uk-domiciled-individuals ↩

  3. Finance Act 2025, Part 2, Chapter 4. https://www.legislation.gov.uk/ukpga/2025/8/part/2/chapter/4 ↩

  4. HMRC IHTM47020 — Long-term UK residence test. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47020 ↩

  5. GOV.UK, Inheritance Tax if you're a long-term UK resident. https://www.gov.uk/guidance/inheritance-tax-if-youre-a-long-term-uk-resident ↩

  6. HMRC IHTM47020 — Long-term UK residence test. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47020 ↩

  7. GOV.UK, Inheritance Tax if you're a long-term UK resident. https://www.gov.uk/guidance/inheritance-tax-if-youre-a-long-term-uk-resident ↩

  8. HMRC IHTM47021 — Transitional provisions. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47021 ↩

  9. HMRC IHTM47021 — Transitional provisions. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47021 ↩

  10. Finance Act 2025, Schedule 13. https://www.legislation.gov.uk/ukpga/2025/8/schedule/13 ↩

  11. GOV.UK, Inheritance Tax: Double Taxation Relief. https://www.gov.uk/guidance/inheritance-tax-double-taxation-relief ↩

  12. HMRC IHTM27160 — Double Taxation Conventions: What is Double Taxation Relief? https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm27160 ↩

  13. The Double Taxation Relief (US) Order 1979. https://www.legislation.gov.uk/uksi/1979/1454/made ↩

  14. The Double Taxation Relief (Ireland) Order 1978. https://www.legislation.gov.uk/uksi/1978/1107/schedule/made ↩

  15. HMRC IHTM47022 — Excluded property comprised in a settlement at 30 October 2024. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47022 ↩

  16. GOV.UK, Capping IHT trust charges for excluded property (October 2024). https://www.gov.uk/government/publications/capping-inheritance-tax-trust-charges-for-former-non-uk-domicile-residents/cap-inheritance-tax-trust-charges-to-5m-for-former-non-uk-domiciles-from-6-april-2025 ↩

  17. GOV.UK, Check if you can claim the 4-year foreign income and gains regime. https://www.gov.uk/guidance/check-if-you-can-claim-the-4-year-foreign-income-and-gains-regime ↩

  18. HMRC RFIG41000 — FIG regime: Introduction. https://www.gov.uk/hmrc-internal-manuals/residence-and-fig-regime-manual/rfig41000 ↩

  19. GOV.UK, Reforming the taxation of non-UK domiciled individuals. https://www.gov.uk/government/publications/tax-changes-for-non-uk-domiciled-individuals/reforming-the-taxation-of-non-uk-domiciled-individuals ↩

  20. GOV.UK, IHT401 form. https://www.gov.uk/government/publications/inheritance-tax-domicile-outside-the-united-kingdom-iht401 ↩

  21. Charles Russell Speechlys, Cross-border estates and the new non-dom regime: UK IHT reporting on death (2025). https://www.charlesrussellspeechlys.com/en/insights/expert-insights/private-wealth/2025/cross-border-estates-and-the-new-non-dom-regime-uk-iht-reporting-on-death/ ↩

  22. Henley & Partners data cited in Mosaic Chambers analysis (January 2025). https://www.mosaicchambers.com/labour-ends-non-dom-tax-regime-wealthy-non-doms-leave-uk ↩

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