Inheritance Tax Planning for UK Expats: Navigating the New Residency Taxation System and Upcoming Pension Changes

For UK expats considering or already living abroad, inheritance tax (IHT) planning is becoming an increasingly critical aspect of wealth management. The UK’s recent shift from a domicile-based taxation system to a residence-based framework, coupled with the 2027 change that will subject pensions to IHT, means expats need to reassess their estate planning strategies.

Understanding the Shift to Residence-Based Taxation

Previously, UK inheritance tax was primarily based on domicile status. If you were UK domiciled, or deemed UK domiciled your worldwide estate remained within the IHT net, regardless of where you lived. However, from April 2025, the UK will transition to a residence-based tax system. This means that expats who have spent a significant amount of time in the UK— 10 out of the last 20 years— they will still be subject to UK IHT on their global assets.

For those who have recently left the UK or are planning to do so, this change presents both challenges and opportunities. Careful planning is needed to mitigate exposure to UK IHT while ensuring tax efficiency in your new country of residence. The new residence based system and the 10 out of 20 year rule means that conversely, if you have been outside of the UK for 10 out of 20 years (before the chargeable event) your will only be subject to IHT on your UK situs assets.

Pensions to Fall Within the IHT Net from 2027

Another major change set to impact UK expats is the inclusion of pension funds within the IHT net from 2027. Currently, most UK pensions fall outside the scope of IHT, meaning they can be passed on tax-efficiently. However, under the new rules, pension funds are planned to be subject to the standard 40% inheritance tax rate upon the death of the pension holder. This will apply to all UK pension schemes no matter where in the world you reside, or how long you have been offshore. As the UK pension is a UK situs asset.

This significantly alters the landscape for both UK residents and expats who have used UK pensions as a means of transferring wealth efficiently.

Key IHT Planning Considerations for UK Expats

1. Assess Your Residency Status and Future Plans

Understanding how long you have spent outside of the UK over the past 20 years is crucial in determining whether your estate remains within the IHT scope. If you are approaching the 10-year threshold.

2. Review Pension Structures and Transfer Options

With UK pensions becoming liable for IHT from 2027, expats should evaluate whether alternative pension structures, such as QROPS or offshore pension solutions, could provide better tax efficiency. However, transferring a pension is a complex decision requiring specialist advice.

3. Consider Gifting and Trust Strategies

One way to reduce an IHT liability is through lifetime gifting. The UK’s seven-year rule means that gifts made more than seven years before death fall outside the IHT net. Trusts can also play a valuable role in estate planning, helping to ring-fence assets and manage tax exposure.

4. Diversify Investment Holdings

Holding assets in the UK—such as property and bank accounts—may increase IHT exposure. Diversifying assets into international investment structures, offshore bonds, or non-UK domiciled platforms or products could help in mitigating liabilities if you meet the long term non residency criteria.

The UK’s Move to a Residence-Based Taxation System: What It Means for UK Residents and Non-Residents

The UK is undergoing a significant shift in its taxation framework, moving from a domicile-based system to a residence-based taxation model. This transition, set to take effect in 2025, marks a fundamental change in how individuals are taxed on their global income and assets. In this blog, we’ll explore what this means for both UK residents and non-UK residents, and how expatriates and high-net-worth individuals should prepare for the changes.

What Is the New Residence-Based Taxation System?

Under the current system, taxation in the UK has been largely based on the concept of domicile. Non-domiciled individuals (non-doms) have benefited from a remittance basis of taxation, meaning they were only taxed on UK income and gains, and on foreign income and gains only when brought into the UK.

The new system replaces this domicile-based approach with a residence-based system, aligning the UK with many other jurisdictions that tax individuals based on where they live rather than where they are domiciled.

This means that from April 2025, individuals who are UK residents will be subject to UK tax on their worldwide income and gains, regardless of their domicile status.

Key Changes and Their Impact

For UK Residents

1. Taxation on Worldwide Income
   • UK residents will now pay tax on all their global income and gains, regardless of their domicile status.
   • This change eliminates the ability for non-doms to use the remittance basis, which allowed them to keep offshore income and gains tax-free unless remitted to the UK.

2. Transitional Rules for Non-Doms

1. • Individuals who were previously benefiting from the remittance basis will have a four-year transitional period.
   • During this period, non-doms who become UK residents can elect to pay tax on only 50% of their foreign income.
   • There is also a rebasing relief, which allows certain assets held before April 2019 to be taxed only on gains from April 2019 onwards.

3. Foreign Trusts and Structures

1. • Offshore trusts will no longer offer tax protection for UK residents.
   • Previously, non-doms could shield foreign income and gains in offshore trusts. Under the new rules, UK residents will be taxed on the income and gains arising within these structures.

For Non-UK Residents

1. UK-Sourced Income Taxation Continues
   • Non-UK residents will continue to be taxed on their UK-sourced income, such as rental income from UK properties.
   • However, they will generally not be taxed on foreign income unless they spend significant time in the UK and become tax resident. It’s important expats comply with the UK Statutory Residence Test.

2. Inheritance Tax Changes

1. • A major impact of the move to a residence-based system is the proposed change to inheritance tax (IHT).
   • Currently, IHT is based on domicile status, meaning non-doms could avoid IHT on non-UK assets.
   • Under the new system, individuals may be subject to IHT on their worldwide assets if they have been UK resident for 10 out of the last 20 years.

3. Temporary Non-Residence Rules

1. • The existing temporary non-residence rules will still apply, meaning individuals who leave the UK but return within five years may still be taxed on certain gains.

4. IHT on UK assets for exapts Expats will still be subject to IHT on UK situs assets such as property or pensions

Planning Considerations

Given these sweeping changes, UK residents and non-residents alike should reassess their tax planning strategies:

For UK Residents:

• Review Offshore Assets and Trusts – Those relying on offshore structures should seek professional advice to understand their tax exposure.
• Plan for Foreign Income – With worldwide income now taxable, structuring income efficiently will be essential.
• Utilise the Transitional Reliefs – The four-year window offers a chance to restructure finances before full taxation kicks in.

For Non-Residents:

• Assess UK Ties – If you have lived in the UK in the past, you may still face tax liabilities under the new system.
• Understand IHT Exposure – Non-residents who have spent significant time in the UK should review their estate planning to mitigate IHT risk.
• Plan Property Ownership Carefully – The taxation of UK property remains unchanged, but tax-efficient structuring could be beneficial.

Final thoughts

The shift to a residence-based taxation system is one of the most significant changes in UK tax law in decades. While it simplifies certain aspects of taxation, it also removes key benefits that non-doms had previously enjoyed. Although it may benefit long term non residents and expats in relation to their IHT liability.