The UK’s New Inheritance Tax System: The Shift to a Residence-Based Approach and the Role of Double Taxation Treaties

Introduction

The 2024 Autumn Budget introduced a significant reform to Inheritance Tax (IHT), moving from a domicile-based framework to a residence-based system from 6 April 2025.

Under the new rules, individuals who meet the criteria of long-term UK residents will be subject to UK IHT on their worldwide assets, regardless of their domicile status.

Additionally, those who leave the UK after the 5^th April 2025 will not immediately escape IHT liability, as a residual UK tax exposure ("IHT tail") will continue for up to ten years after departure, depending on the individual’s period of residence in the UK before leaving.

The move to residence-based taxation represents a major shift in the UK's approach to inheritance tax, raising important questions about its impact on internationally mobile individuals.

One of the key concerns is whether Double Taxation Treaties (DTTs) can still provide relief and prevent worldwide assets from being caught by UK IHT after an individual has left the country.

The New Residence-Based IHT System

From Domicile to Residence: A Fundamental Shift

Under the old IHT system, a UK-domiciled (or deemed domiciled) individual was taxed on their worldwide estate, while a non-UK domiciled individual was subject to IHT only on UK situs assets.

However, from 6 April 2025, domicile will no longer be the determining factor for UK IHT.

Key provisions of the updated legislation include:

1. Long-Term UK Resident Definition

An individual will be classified as a long-term UK resident if they have been resident in the UK, under the Statutory Residence Test rules, for at least 10 out of the preceding 20 tax years.

2. Worldwide Asset Taxation

The worldwide estate of a long-term UK residents will be subject to UK IHT, even if he/she will be domiciled outside the UK.

3. Residual IHT Liability (‘10-Year Tail’)

Individuals who cease to be UK residents under the Statutory Residence Test but do not re-establish residency before or during the tax year of the chargeable event, will remain subject to UK IHT on their worldwide assets for up to 10 years.

4. Settled Property

The domicile-based rules for determining the excluded status of settled property have been replaced by the long-term residence test. Trusts with settlors or beneficiaries classified as long-term UK residents may face IHT exposure on assets previously excluded under the domicile framework.

These changes require careful consideration for individuals relocating abroad, particularly where they maintain substantial ties to the UK.

The IHT Tail: Continued UK IHT Exposure After Departure

One of the most controversial aspects of the reform is the IHT tail period, which means that, even after ceasing UK residence, an individual will remain within the scope of UK IHT for up to ten years.

The length of this residual liability depends on the number of tax years spent in the UK before departure.

This means that an individual who has lived in the UK for 20 years and departs in 2026 will still be liable for UK IHT until 2036.

The impact of this tail period is particularly relevant for those who relocate to jurisdictions with their own inheritance tax regimes, as this could lead to double taxation on the same assets but also a potential long-lasting exposure to UK IHT even if the country or relocation may not impose IHT at all.

The Role of IHT Double Taxation Treaties Under the New Rules

The UK’s IHT legislation provides both unilateral relief (under s.159 IHTA 1984) and bilateral relief through specific IHT treaties.

The UK has entered into IHT DTTs with ten countries, which were negotiated in two separate periods:

These mechanisms aim to mitigate double taxation on estates subject to inheritance tax in multiple jurisdictions.

When both unilateral relief and a DTT apply, the treaty provisions take precedence if they offer greater relief (s.159(7) IHTA 1984).

S. 159 IHTA 1984 sets out the conditions for the UK to give unilateral relief against IHT charged on properties situated overseas.

Where overseas tax has become payable in the same country as the property on which it has been charged is situated, the credit is equal to the amount of the overseas tax (s 159(2)).

Inheritance tax liability is typically determined based on two main criteria:

1. Personal connection to the country: domicile, residence, or nationality of the deceased or beneficiary;

2. Location of assets: where the asset is physically or legally situated.

Cross-border estates can be subject to double taxation when two or more jurisdictions claim taxing rights over the same assets.

This generally occurs in the following situations:

1. Residence-Source Conflict

• One country (A) imposes tax based on the deceased’s residence, domicile, or nationality

• Another country (B) taxes the same assets because they are located within its jurisdiction

In this scenario, assets situated in country B may be taxed twice under different legal principles.

• Residence-Residence Conflict

When two or more countries impose inheritance tax on the estate of an individual due to residence, domicile, or nationality, his or her estate may become subject to double taxation.

• Source-Source Conflict

This occurs when multiple jurisdictions claim an asset is situated within their territory due to differing rules on asset location.

As a result, the same asset may be taxed in multiple countries based on conflicting situs definitions.

To reduce these tax burdens, double taxation treaties (DTTs) can take precedence over domestic tax laws, ensuring a fairer allocation of taxing rights between jurisdictions.

The UK has signed ten IHT Double Taxation Treaties (DTTs) with various countries.

These treaties were originally designed to prevent double taxation by allocating taxing rights between the UK and the treaty partner.

They typically operate by either:

• Allocating exclusive taxing rights to one jurisdiction, ensuring that only one country taxes an estate

• Granting tax credits, allowing IHT paid in one country to be offset against tax due in the other

The existing UK IHT treaties were all negotiated under the old domicile-based system, meaning that their effectiveness under the new residence-based approach remains uncertain.

However, since the UK government has stated that these treaties will not be renegotiated, their provisions will likely continue to operate as originally drafted.

The question is whether Inheritance Tax Double Taxation Treaties can protect a long-term UK resident's foreign estate from UK IHT after they leave the UK.

The main benefit of IHT DTTs is that they prevent estates from being taxed in two jurisdictions at the same time.

Many treaties exclude foreign assets from UK taxation if the individual is domiciled in the other treaty country at the time of death.

However, not all treaties provide complete protection.

Some only offer tax credit relief, meaning that even if IHT is paid in one country, a further liability in the UK may still arise.

Additionally, most IHT treaties do not cover lifetime gifts, which means that assets transferred before death could still fall within the scope of UK IHT, even if treaty relief applies to the estate.

Conclusion

The shift to a residence-based IHT system, combined with the introduction of the IHT tail, represents one of the most significant changes to UK tax law in recent years.

While the UK IHT treaties remain in place, their ability to protect estates from residual UK tax liability post-departure remains a complex and case-specific issue.

A detailed analysis of an individual's UK residence history, treaty eligibility, and domicile status will be essential in structuring an estate efficiently.

Given the uncertainties surrounding how existing treaties interact with the new rules, professional tax planning is now more critical than ever.

For those affected by the new IHT regime, expert advice will be essential in determining how to best structure an estate and mitigate unnecessary UK tax exposure.