October Budget 2024 – Changes to domicile for UK inheritance tax

Senior Associate, Charlotte Macdonald, of Stone King’s International and Cross-Border Team, comments on the Budget announced by Rachel Reeves, which, as expected, has made some major changes to the concept of domicile for tax purposes.

Inheritance taxation

Domicile has been the “connecting” factor for many years when determining whether a person will have inheritance tax levied by HMRC on their worldwide estate, or just their UK estate, following their death.

Domicile is a complex concept, and to determine it means looking at a raft of factors which include considering where an individual’s parents considered their home, where the individual lived, and what their future intentions are, amongst other factors.

From 6 April 2025, domicile will no longer be the connecting factor – it will be replaced by the more straightforward concept of residence.

If, before their death, an individual has been resident in the UK for at least ten of the last 20 tax years (“a long-term resident”), their worldwide assets will be assessed for tax by HMRC on their death. 

For those individuals who are not considered long-term residents, only their assets situated in the UK will be assessed for UK inheritance tax.

An individual will not be treated as long-term resident for inheritance tax purposes in the year following ten consecutive years of non-residence, even if they return to the UK. At this time, the test is effectively reset.

The change to a residence-based system will add a level of certainty that was missing under the domicile system. Due to the complex nature of domicile, it has caused uncertainty for many, and in some cases has meant that those who have lived outside the UK for many years (even 40 years +) were still subject to worldwide inheritance taxation by HMRC on their deaths. This will no longer be the case. 

Inheritance tax for trusts

Under the current domicile-based rules, if an individual settles non-UK property into a trust (known as excluded property) and then subsequently becomes UK domiciled, the excluded property retains a tax favourable status and isn’t subject to inheritance tax in the UK. 

From 6 April 2025, this will no longer be the case. Assets comprised in a trust will only be deemed to be excluded property, when the settlor is not a UK long-term resident. 

This change will apply to all trusts, regardless of when the property entered the trust (subject to a small exception for those settlors who die prior to 6 April 2025).

The consequence of this change, is that many assets situated outside the UK and settled into trusts before the settlor became UK resident, will now become subject to UK inheritance taxation. 

If you would like to speak to Stone King’s specialist International and Cross-Border Team about how these changes will affect you, please email international@stoneking.co.uk or call +44(0) 1225 337599 and ask to speak to a member of the team.