Inheritance tax UK rules changed substantially in 2025. British expats should know these changes affect their estate planning directly. The UK government replaced the traditional domicile-based system with a residence-based approach. Your tax liability changes based on where you live now.
British citizens living abroad paid UK inheritance taxes based on their domicile status for years. The new regulations determine your tax obligations through your residency history instead. Many expatriates who thought they were clear of the tax net get caught again under these new non-resident inheritance tax UK policies. Your worldwide assets face unexpected tax bills if you’ve lived abroad for less than ten consecutive years.
Expat Wealth At Work will help you understand how these new rules work. You’ll learn about available exemptions and steps to protect your estate. A real-life example will show how effective planning could save your beneficiaries thousands in unnecessary taxes.
Understanding the Shift to Residence-Based IHT
The UK inheritance tax underwent a fundamental change in 2025. The centuries-old domicile system gave way to a simpler residence-based approach. This transformation marks one of the biggest changes to the UK’s inheritance tax framework in decades.
What changed in 2025?
UK tax authorities completely revamped how they decide who pays inheritance tax. The old system revolved around “domicile”—a complex legal concept that kept British citizens in the UK tax net no matter where they lived. The new residence-based system determines your tax status based on your actual place of residence.
The new rules set a clear 10-year cutoff. Your non-UK assets become exempt from UK inheritance tax after you live outside the UK for ten straight years. While many expatriates with substantial offshore assets benefit from this change, it also removed certain privileges. This legislation especially affects spousal transfers and residence-related allowances.
Why the UK moved from domicile to residence rules
The UK wanted to create a clearer, more enforceable system with this move to residence-based taxation. The old domicile concept proved hard to escape and left many expatriates uncertain about their status. The residence test offers a clear timeline (10 years) with measurable criteria.
The change also brings the UK closer to international tax standards, where residence often determines tax obligations. This new approach closes some loopholes while creating new planning opportunities for people who truly establish their lives abroad.
Who is the new system’s target?
The residence-based inheritance tax rules in the UK affect the following groups:
- Recent expatriates – People living abroad for less than 10 straight years stay fully in the UK tax net
- Long-term non-residents – Only UK-based assets remain taxable after 10 years abroad
- Couples with mixed residency – Special rules apply to spouses with different residency status
- Anyone with UK property – UK-situs assets remain taxable whatever your residency
The changes work best for genuine long-term expatriates. They might add complexity for people in transition or those with mixed residency status. Your specific circumstances, asset location, and timing of residence changes determine how much the legislation affects you.
How the New Rules Affect Your IHT Allowances
Estate planning, under the new UK inheritance tax rules, requires you to understand your allowances to minimise tax exposure. The 2025 changes keep some exemptions and remove others based on your residency status.
The Nil Rate Band: What stays the same
The standard Nil Rate Band stays at £325,000 per person, even with the major changes. This simple allowance applies whatever your UK residency status. Your worldwide assets fall under this exemption if you’re UK-resident. Non-residents only need to consider their UK-based assets. British expatriates can use this consistent figure as their baseline for planning.
The Residence Nil Rate Band: What you lose as a non-resident
Non-UK resident status comes with a big drawback – you lose the valuable £175,000 Residence Nil Rate Band. You can’t claim relief from inheritance tax for a UK main residence while being a non-UK resident. So your total potential tax-free allowance drops by more than a third compared to UK residents. Many expatriates consider this loss a key factor in their residency choices for tax planning.
Combining allowances as a couple
The new system presents married couples with some complex choices. Here are your options:
- UK resident option: Your worldwide assets face UK inheritance tax, but you get both spouses’ combined allowances (up to £1,000,000 total) and keep tax-free transfers between spouses
- Non-resident option: UK assets only face taxation, but your estate gets tested against the £325,000 allowance twice instead of combining them
In spite of that, your asset mix determines the best choice. Couples with assets under £1,000,000 often benefit from the UK resident election. Yes, it is better for those with substantial offshore holdings to choose non-resident status, even though they lose some allowances. Each situation needs a careful look at both asset location and total value.
Key Tax Implications for British Expats
The British tax code changes in 2025 will deeply affect how expatriates manage their estates. Your offshore strategy’s tax savings depend on understanding these vital provisions correctly.
Non-resident inheritance tax UK: What’s still taxable
The UK’s inheritance tax rules still apply to your UK-based assets after you become a non-resident. Your properties, UK bank accounts, and UK-situated investments remain taxable. The system now tests each spouse’s estate against the £325,000 allowance separately. The original system effectively combined the allowances, unlike this approach. Couples with large UK holdings may face higher taxes because of this separate treatment.
Pensions now included in your estate
UK pensions will lose their inheritance tax exemption from April 2027. This creates an urgent planning need for expatriates holding British pensions. You could withdraw funds and pay 20–45% income tax, move to QROPS with a 25% overseas transfer charge, or draw down pensions before other assets. Your overall asset mix and timeline will determine the best approach.
Inter-spousal transfers and residency elections
The treatment of inter-spousal transfers represents one of the most important changes. These transfers used to happen tax-free, whatever the location, before 2025. The new system removes this benefit unless your surviving spouse chooses UK resident status. This choice brings their worldwide assets under UK tax rules until they’ve lived abroad for 10 straight years. Many people with substantial offshore holdings find this unappealing.
How long you must live abroad to be exempt
Ten years stands as the crucial number in the new rules. Living outside the UK continuously for a decade makes your non-UK assets exempt from British inheritance tax. Expatriates now have a clear timeline to plan around.
Do you need assistance in structuring your wealth offshore in a tax-efficient manner? We invite you to schedule your complimentary initial consultation today.
Real-World Example: Edward & Dorothy’s Tax Planning Choices
Let’s look at Edward and Dorothy’s story to see how the 2025 inheritance tax changes work in real life. Their case perfectly shows how choosing where you live affects your tax situation under the new rules.
Asset breakdown and residency status
Edward and Dorothy moved to Spain in 2020. Here’s what they own together:
| Asset Type | Value |
|---|---|
| UK Home | £450,000 |
| Spanish Villa | £350,000 |
| UK Investments | £200,000 |
| Offshore Investments | £500,000 |
| UK Pension | £300,000 |
| Total Estate | £1,800,000 |
They’ve lived abroad for five years now. The tax system sees them as non-UK residents, but they haven’t reached the vital 10-year mark for complete exemption yet.
First spouse’s death: tax outcomes
Edward passes away in 2026, leaving his £900,000 share of the estate. His UK assets (£475,000) still face UK inheritance tax because he hadn’t been away for 10 years. The tax office takes £60,000 after applying his £325,000 nil-rate band to the remaining £150,000 at 40%.
The story would be different if they’d stayed UK residents. Their worldwide estate would face taxes, but they could have used the residence nil-rate band on their family home.
Second spouse’s death: comparing scenarios
Dorothy dies three years later, eight years into their non-resident status. Dorothy fails to meet the 10-year exemption threshold, resulting in a 40% tax on her UK assets beyond her nil-rate band.
UK residency would have given Dorothy access to Bill’s unused allowances. This could have allowed £1,000,000 of their estate to be tax-free.
How much tax they saved by staying non-resident
Their choice to become non-residents saved them about £180,000 in inheritance tax across both estates. The savings came from two main factors:
- Their offshore investments (£500,000) didn’t face UK taxation
- The Spanish villa stayed clear of UK inheritance tax
They lost the residence nil-rate band, but keeping their non-UK assets away from taxation worked out better for their particular case.
Time to Act: Securing Your Estate Under the New Rules
The new UK inheritance tax changes bring a fundamental change for British expats worldwide. Your tax liability now depends on your residency history instead of the complex concept of domicile. This 10-year threshold creates both challenges and opportunities based on your situation.
Your estate planning strategy needs immediate review before these rules take effect in 2025. British expats who hold substantial offshore assets will benefit a lot from this new residence-based approach. You must weigh those benefits carefully against losing certain allowances like the £175,000 Residence Nil Rate Band.
Your UK assets will face inheritance tax whatever your country of residence. The new system makes strategic asset location decisions even more crucial. The pension taxation rules also need proactive planning to reduce tax burdens on your beneficiaries.
Edward and Dorothy’s example shows how proper planning could save your family thousands in inheritance taxes. Your unique asset mix, residency timeline, and family situation will determine the best approach. Some expats should keep their UK resident status, while others need to actively pursue non-resident status.
Time moves quickly. You should talk to a specialist in expatriate tax planning who knows both UK inheritance rules and your country’s residence laws. Quick action today gives you more options to arrange your estate tax-efficiently and protect your family’s future.