NEW RESIDENCY RULES FROM 6 APRIL 2025

The concept of domicile as a connecting factor has been replaced with the concept of a Long-Term Resident (LTR).  Previously, non-UK domiciles and non-deemed domiciled individuals were subject to Inheritance Tax (IHT) on their UK assets only.

The new rules, which were effective from 6 April 2025, mean that:

• for the first nine years of residence, an individual will be subject to UK IHT on their UK situs assets only;
• an individual will be treated as a LTR once they have been resident in the UK for 10 out of the previous 20 tax years;
• from year 10, a LTR individual will be subject to IHT on their worldwide assets.

Inheritance Tax tails

Additionally, HMRC has introduced an Inheritance tax “tail”.  A Long-Term Resident’s worldwide assets will remain within the scope of Inheritance Tax for several years after becoming non-UK resident, commonly referred to as the “Inheritance Tax tail”.

The minimum length is three years, which applies to individuals who have been UK resident for 10 to 13 of the past 20 UK tax years, increasing by one tax year for each additional year of residence (up to a maximum of 10 years). For example, if you have been UK Resident for 20 out of the past 20 tax years, your IHT tail will be 10 years after becoming non-UK resident.

This rule means that a LTR’s worldwide assets will remain within the scope of IHT for several years after their departure. British domiciles living overseas may also be liable to pay IHT, so our residence tax specialists can also advise in these circumstances.

BUSINESS PROPERTY RELIEF (BPR) AND AGRICULTURAL PROPERTY RELIEF (APR) FROM 6 APRIL 2026

Changes were announced changes in BPR and APR in the Autumn Budget 2024, which will take effect from 6 April 2026.  These changes stand to have a significant impact – where IHT relief was previously 100% or 50%, it will now be reduced to £1 million (£1m) across the combined value of qualifying property at 100%, and the balance at 50%.

Additionally, the rate of BPR on shares not listed on a recognised stock exchange (e.g. AIM shares) will be reduced from 100% to 50%.  The £1m limit is per individual and is not transferrable to a spouse (such as on death, for example).

This makes BPR and APR planning a key component of Inheritance Tax planning and Wills should be updated to ensure that an individual’s £1m allowance is not lost.

Details still to be confirmed

HMRC has been in consultation regarding the application of the £1 million allowance for property settled into trust qualifying for 100% APR, or BPR. This consultation period has now closed, and we are awaiting the outcome which will cover the following areas:

• Combined Allowance: a new £1 million combined allowance will apply to property qualifying for 100% APR or BPR. After this allowance is exhausted, relief will apply at a reduced rate of 50% for the combined value of qualifying agricultural and business property.
• Shares on Recognised Stock Exchanges: the rate of BPR for shares not listed on recognised stock exchanges (e.g., AIM) will be reduced from 100% to 50%.
• Trusts: for trusts, the £1 million allowance will be shared among all trusts created by the same settlor. Trusts established before 30 October 2024 will retain their own £1 million allowance.
• 7 Year Refresh: every seven years the £1m is refreshed giving another £1m allowance.

These proposals may have a significant impact on some individual clients. Please contact us to discuss if you have business or agricultural interests of more than £1 million.

INHERITANCE TAX CHANGE FOR PENSIONS FROM 6 APRIL 2027

Currently, pensions are generally exempt from IHT and are not included in the estate value calculation. The proposed changes, which come into effect from 6 April 2027, will bring unused pension funds and death benefits into the value of a person’s estate for IHT purposes.

A consultation on the proposed pension changes has ended and we expect further detailed guidance will be published later this year. However, in principle, for individuals over 75, unused pension funds will be subject to both income tax (at the beneficiary’s marginal rate) and Inheritance Tax (at 40% on the value exceeding the nil-rate band), if left to someone other than a spouse. This means beneficiaries could face a combined tax burden on inherited pensions of 67% effectively.

HOW WE CAN HELP

With so many significant IHT changes ahead, it is imperative clients review their Wills and that Inheritance Tax and succession planning advice is sought. To discuss this, or any other area of concern in relation to taxation and financial affairs, please get in touch with your usual SRLV advisor, or email our Partner, Kieron Clement-Smith, or Senior Tax Manager, Bridget Martin.

This material is published for the information of clients and contacts. It provides only an overview of the regulations  in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or SRLV LLP.

* Source: Aberdeen Investments (January 2025)