Inheritance Tax Updates: Major Changes to IHT Rules from April 2025

The UK’s Autumn Budget, announced on 30 October 2024, confirmed significant changes to the Inheritance Tax (IHT) rules, set to take effect from 6 April 2025. These reforms will see the UK tax system shift from domicile-based taxation to a residence-based regime. Below, we outline the key changes and their implications for individuals and trustees.

Key Changes to IHT Rules

1. Worldwide Asset Exposure for Long-Term ResidentsFrom 6 April 2025, individuals classified as “Long-Term Residents” (LTRs) will be subject to IHT on their worldwide assets. LTR status applies to those who have been UK tax residents for at least ten out of the previous twenty tax years. Importantly:

• Non-UK Situs Assets: These will now fall within the scope of IHT if the individual is an LTR at the time of the chargeable event (e.g., death or a lifetime transfer).
• Tail Period: After ceasing UK residency, LTRs remain exposed to IHT for a tail period, lasting between three and ten years, depending on the duration of prior UK residence. For example:
  • 10-13 years of residence: Tail period of 3 years.
  • 14-19 years of residence: Tail period increases by one year per additional year of UK residence.
  • 20 years of residence: Maximum tail period of 10 years.

2. Changes to Trust RulesTrusts established by non-UK domiciled individuals (known as excluded property trusts) will see their IHT treatment revised:

• LTR Settlors: From 6 April 2025, if the settlor becomes an LTR, the trust’s assets will be subject to the IHT “relevant property regime,” including ten-year anniversary charges and exit charges (up to 6%).
• Grandfathering Provisions: For trusts created before 30 October 2024, assets will not be within the settlor’s estate for IHT purposes if the settlor can benefit from the trust. However, any additions to these trusts after 30 October 2024 may be subject to different rules.
• Exit Charges: If the settlor ceases to be an LTR, non-UK situs assets could revert to excluded property status, triggering an IHT exit charge.

Implications for Individuals and Trustees

For Individuals:

• Those considering leaving the UK before April 2025 to shield non-UK situs assets from IHT must carefully manage their UK tax residency using the statutory residence test.
• For those planning long-term stays, understanding the tail period’s implications will be essential for estate planning.

For Trustees:

• Trustees of excluded property trusts must assess the trust’s exposure to IHT if the settlor becomes an LTR.
• Planning for potential liquidity requirements to meet IHT charges is critical, especially as raising funds could trigger other tax liabilities.
• Trustees should also prepare for the possibility of an IHT exit charge if the settlor’s LTR status ends.

Next Steps

The changes outlined in the Finance Bill 2025 are subject to minor amendments before becoming law. However, the core principles are expected to remain unchanged. As a result, these reforms will have far-reaching consequences for estate and trust planning.

We strongly recommend seeking professional advice to navigate these complex changes. Our team is here to assist individuals and trustees in understanding their new obligations and developing strategies to mitigate IHT exposure. Contact us today to discuss your specific circumstances.