The UK’s Inheritance Tax Reforms for 2025: Key Changes and Implications

Inheritance Feb 24, 2025

The UK government has announced significant changes to the inheritance tax (IHT) regime, which will come into effect on 6 April 2025. These reforms will shift the taxation framework from a domicile-based system to one focused on residence, significantly impacting both UK residents and non-domiciled individuals with UK connections. This article provides an in-depth analysis of the new rules, their implications, and steps individuals should take to prepare for the changes.

Key Changes to the UK Inheritance Tax Regime

1. Introduction of the Long-Term Resident (LTR) Status

One of the most consequential changes is the shift from domicile to residence-based taxation. Under the new system, an individual will be classified as a Long-Term Resident (LTR) if they have been a UK tax resident for 10 or more of the past 20 tax years. Once classified as an LTR, individuals will be liable for IHT on their worldwide assets, regardless of their domicile status.

The "Tail" Rule

Even after an individual ceases to be a UK resident, their exposure to IHT on worldwide assets does not immediately end. Instead, they will remain within the scope of UK IHT for 10 years following their departure from the UK, known as the "tail" rule. The calculation of this tail follows a transitional approach based on the individual's UK tax residency history prior to 6 April 2025:

If an individual has been a UK tax resident for 10 or more of the last 20 years before 6 April 2025, they will be subject to the full 10-year tail upon leaving the UK.
If an individual has been a UK tax resident for less than 10 years by 6 April 2025, their tail period will be calculated proportionally. The formula used will be: (Years of UK tax residence / 10) × 10 years.
For example, if an individual has been a UK tax resident for 8 out of the last 20 years by 6 April 2025, their tail period will be adjusted to 8 years instead of the full 10 years.
Individuals who establish UK residency after 6 April 2025 will be subject to the standard 10-year tail rule upon departure once they accumulate 10 qualifying years.

This means that individuals who relocate abroad must carefully consider their potential tax liabilities during this period, as well as how the transitional provisions affect their estate planning.

Implications:

Individuals who have been living in the UK for an extended period, including those previously benefiting from the non-domicile regime, will see a dramatic increase in their IHT exposure.
Those planning to emigrate from the UK must factor in the 10-year tail when structuring their estate planning.
Non-UK assets held in trusts by former UK residents could now fall within the UK IHT net if the settlor was classified as an LTR at the time of departure.

2. Changes to Trust Taxation

Currently, excluded property trusts (EPTs) allow non-UK domiciled individuals to shield non-UK assets from IHT by settling them into a trust before becoming UK domiciled. However, under the new rules:

The IHT status of a trust will be based on whether the settlor was an LTR at the time the IHT charge arises rather than at the time the trust was created.
If the settlor is an LTR at the time of a chargeable event (such as their death or a trust anniversary charge), non-UK assets will no longer be classified as excluded property and will be subject to IHT.

Implications:

Existing EPTs will no longer provide a complete shelter from IHT for long-term UK residents.
Trusts that were previously safe from IHT may now become taxable, necessitating a review of trust structures.
Non-UK domiciled individuals considering moving to the UK should establish trusts well in advance to mitigate potential tax exposure.

3. Adjustments to Agricultural and Business Property Relief

From 6 April 2025, the government will make adjustments to IHT reliefs for agricultural and business property:

Agricultural Property Relief (APR): The scope of APR will expand to include land managed under environmental agreements with UK governmental bodies.
Business Property Relief (BPR): From 6 April 2026, BPR will be subject to a cap, with business assets exceeding £1 million incurring a 20% IHT rate.

Implications:

Family businesses will need to reassess their succession planning, as the new limits on BPR could lead to higher tax burdens.
Landowners engaged in environmental schemes may benefit from extended APR but must comply with the specific requirements to qualify.

4. Inclusion of Pension Assets in IHT

Under the current rules, pension assets are generally outside the scope of IHT. However, from 6 April 2027, the government plans to include unused pension funds and certain death benefits within an individual's taxable estate. This change raises concerns over whether life insurance policies written in trust, which have historically been exempt from IHT, will now be subject to taxation. While detailed guidance is awaited, preliminary reports suggest that only death benefits arising from pension funds, rather than life insurance proceeds held in trust, will be affected. However, individuals should review their estate planning to ensure continued IHT efficiency.

Implications:

This change may significantly impact estate planning, as pensions have traditionally been used as an effective inheritance tax shelter.
Individuals should consider withdrawing funds strategically or restructuring their pensions to minimize potential tax exposure.

What Should Affected Individuals Do?

1. Review Your Estate Plan

Given the substantial expansion of IHT liability, individuals who may be classified as LTRs must review their estate planning strategies. This includes assessing:

The potential exposure of non-UK assets to IHT.
The use of trusts and whether restructuring is necessary.
Succession planning for businesses and agricultural holdings.

2. Plan for Emigration from the UK

Individuals planning to leave the UK should be aware of the 10-year tail rule and take steps to mitigate its impact:

Consider gifting assets before reaching LTR status to reduce future IHT liabilities.
Review trust structures to ensure non-UK assets remain outside the IHT net.
Leave the UK before the new rules become effective.

3. Seek Professional Advice

These changes significantly alter the tax landscape for UK residents and non-domiciled individuals. Given the complexity, it is essential to consult a tax professional or estate planning expert to develop strategies that minimize exposure to IHT.

Conclusion

The upcoming inheritance tax changes represent a fundamental shift in the UK’s approach to taxing estates, particularly for long-term UK residents and non-domiciled individuals. The introduction of the LTR status and the 10-year tail rule means that a far greater number of individuals will find themselves within the scope of UK IHT. Additionally, the reforms to trust taxation, business reliefs, and pensions will require careful planning to avoid unintended tax consequences.

With just one month before implementation, individuals should take immediate action to review their estate planning strategies and seek expert advice to mitigate potential tax exposure.