Yesterday’s Budget confirmed that the concept of ‘non-domiciled’ will be abolished from 6 April 2025, bringing with it an important reform of the taxation of individuals who currently hold non-domiciled status and have foreign assets, income and gains.
What are the current rules? Pre-6 April 2025
If an individual is regarded ‘non-domiciled’, only their UK assets are subject to Inheritance Tax. An individual is ‘deemed domiciled’ if they have been resident in the UK for at least 15 out of the 20 tax years preceding the event that triggers Inheritance Tax.
What is changing?
From 6 April 2025, the UK will move to a residence-based system, and the concept of ‘long-term residence’ will be introduced.
An individual will be considered a ‘long-term resident’ if they have been living in the UK for at least 10 out of the last 20 years, meaning that on death, their worldwide assets will be in scope for UK Inheritance Tax.
They will remain ‘in scope’ for Inheritance Tax for between 3 and 10 years after leaving the UK, depending on how long they had been resident. Broadly speaking:
- Those who have been UK resident between 10-13 years, will need non-UK tax residence for 3 consecutive years, and this is increased by one tax year for each additional year of residence.
- Those who have been UK resident for 20 years or more, will need non-UK tax residence for 10 consecutive years.
It is not yet clear how this will work in practice once an individual is no longer UK resident, but it is likely that the UK will rely on the exchange of information from foreign tax authorities.
Spouse exemption
Currently, transfers between spouses with the same domicile benefit from a full exemption of Inheritance Tax. Transfers from a UK domiciled spouse to a non-UK domiciled spouse are limited to £325,000 (on top of the individual’s available nil rate band), however, the non-domiciled spouse can make an election to be treated as UK domiciled for Inheritance Tax which comes to an end after the spouse who made the election is non-UK resident for 4 consecutive tax years.
From April 2025, the ‘non long-term resident’ spouse, will be able to make an election to be treated as a long-term resident, which will last until they have been non-UK resident for 10 consecutive tax years.
Transitional provisions
There will be transitional provisions for those currently non-domiciled individuals and non-resident deemed domiciled in 2025/2026. They will be long-term resident if they satisfy the existing deemed domiciled test, that is, if they have been resident in the UK for at least 15 out of the 20 tax years. If they then return to the UK, the new rules will apply.
HMRC has set out some case studies to examine how the transitional provisions will apply:
Case study: Maria is non-domiciled and was UK resident for 11 years. She became non-resident in 2025-2026:
- She never became deemed domiciled and, under the transitional provisions her non-UK assets would not come into the scope of Inheritance Tax from 6 April 2025.
- If she returns to the UK, she would be subject to the 10 out of 20 years residence test, which includes the years of residence in the UK up to 2024 to 2025.
Case study: Pierre is non-domiciled and was UK resident for 17 years, so is deemed domiciled under the current rules. He became non-resident in 2024 to 2025 and does not return to the UK:
- Under the transitional provisions, Pierre will be a long-term resident but the old 15 out of 20 test will apply to him, including remaining in scope until his fourth year of non-residence. So, he will remain in scope for UK Inheritance Tax on non-UK assets as a long-term resident until 6 April 2027 (i.e. 24/25 tax year 1 of non-residence; 25/26 tax year 2 of non-residence; 26/27 tax year 3 of non-residence, being from 6 April 2027 his 4th year of non-residence)
If you are currently a UK resident with non-domiciled status and assets abroad, it is important that you review your estate and tax planning.
