Goodbye Domicile, Hello Residence: The Inheritance Tax Rule Change You Need to Know

What is Domicile

Domicile is a legal principle rooted in common law that links an individual to a particular legal system, specifically the country they regard as their permanent or indefinite home. It differs from residence, which simply tracks where a person happens to live at a given time.

For more information follow this link: https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/iht-planning-keyfacts/domicile#domicile

Replacement of Domicile with a Residence-Based Test

The rules up to 5 April 2025: Inheritance Tax (IHT) was determined by one’s domicile status and not their residency status in accordance with s44 Finance Act 2025. Initially, individuals who were domiciled or deemed domiciled in the UK would be required to pay IHT on both their UK assets and overseas assets, whereas those who were not considered domiciled or deemed domiciled would only have to pay IHT on their UK assets and were not required to pay IHT on their overseas assets. From 6 April 2025, this system has been replaced with a residence-based scheme.

Criticisms of the Domicile-Based System

The primary criticism was that wealthy non-domiciled individuals who were living in the UK long-term, especially those who had substantial foreign assets, could structure their affairs on the basis that their overseas property would remain outside the scope of UK inheritance tax. As a result, the system was therefore viewed as allowing long-term UK residents to benefit from favourable tax treatment that was not available to those who are UK domiciled.

Moreover, the system was criticised for being too complex and subjective, especially as domicile is difficult to prove or challenge. Unlike residence, which is based on clear statutory tests and day-counting rules, domicile depends on vague concepts of where a person intends to live “permanently or indefinitely”, according to the original two-pronged test for domicile of choice. This can be difficult to prove. For example, in the case of IRC v Bullock [1976], even though the taxpayer settled down in the UK and established a matrimonial home in the UK, he was still able to argue that he always had the intention to return to Canada and managed to remain a non-domiciled individual. This is a clear example of how the old regime caused disproportion and enabled individuals to avoid tax consequences on the basis of where they felt they belonged.

Introduction of the Long-Term Resident Test

From 6 April 2025, instead of asking the question of where your permanent home is, the government started asking how long you have lived in the UK when determining how to charge IHT. If you have been resident in the UK for 10 out of the last 20 years (Inheritance Tax Act 1984 ss 6A–6C), you will be subject to UK IHT.

IHT Tail: The Period After an Individual Leaves the UK

The residence-based test introduced something called the IHT tail, which refers to the period after an individual leaves the UK during which they may still be treated as a long-term UK resident for inheritance tax purposes. If a person has lived in the UK for at least 10 of the previous tax years, they can become fully subject to UK inheritance tax on their worldwide assets. When such an individual leaves the UK, this status does not end immediately. Instead, they may remain within the scope of UK inheritance tax for up to 10 years after departure, depending on how many years they previously lived in the UK. The longer the individual lived in the UK before leaving, the longer this “tail” period will last, ensuring that long-term residents cannot avoid inheritance tax simply by moving abroad shortly before death.

Key Rule to follow: The longer you have lived in the UK, the longer you “carry over” long-term residence status after leaving. Please see table below:

Years Lived in the UK	Years that you keep long-term status after leaving
10-13	3 years
14	4 years
15	5 years
16	6 years
17	7 years
18	8 years
19	9 years
20	10 years

Implications for Wills and Estate Planning

The new domicile rules may present difficulties for some, especially those who have built their wealth and estate plans around the old system. In addition, there may be concerns for those who hold assets in overseas jurisdictions with different tax systems, who could face larger UK tax bills.

Although double tax treaties may provide some relief from IHT liability, there will still be significant costs when it comes to passing assets on at death.

To find the most effective tax planning strategy for you, it is important to stay up to date with the latest developments in tax law, and our team can help you do this. All advice is tailored to your individual circumstances to ensure the very best result for you. Call us on 01489 661220.

Tax and Trusts