Inheritance tax clarity for expatriates and tax benefits when returning to UK
The UK domicile regime has been abolished for tax purposes. The new residence-based system provides more certainty for UK inheritance tax, and full freedom in some cases. Expatriates returning to the UK also benefit from the ‘FIG’ (foreign income and gains) tax regime.
While liability to many taxes depends on your residence status that specific year, UK inheritance tax (IHT) has been based on a vaguer domicile regime. Your British domicile could follow you around the world and many expatriates remained subject to IHT on worldwide assets, even when living abroad for over 10 years. Domicile, or non-domicile in this case, also offered tax benefits to foreign nationals living in the UK.
The unpopular domicile and deemed domicile regime ended on April 6, 2025, when new long-term residence rules come into effect for tax purposes. The new system provides more clarity about expatriates’ inheritance tax position and makes cross-border estate planning more straightforward. Those moving to the UK, whether returning British expatriates or foreign nationals, could also benefit from tax advantages for a number of years.
UK long-term residence definition
Whether or not you are a UK long-term resident depends on your tax residence status (determined by the statutory residence test) and number of tax years.
You are classed as a long-term resident in the UK if you meet either of these criteria:
- You were tax resident in the previous 10 consecutive years
- You were tax resident for a total of 10 or more years over the previous 20
Long-term residence affects:
- Liability to UK inheritance tax
- Tax on foreign income and gains for those moving to UK
Long-term residence and UK inheritance tax
Long-term residents are liable to UK inheritance tax on their worldwide estate (regardless of nationality and where your assets are located).
Once you no longer meet the UK long-term residence criteria, only assets situated in the UK are liable for inheritance tax. The less UK assets you retain, the less likely you are to breach the nil rate bands. Note, however, that UK pensions funds become subject to inheritance tax in 2027.
Expatriates and those leaving the UK
You keep your long-term residence status for up to 10 years after leaving the UK, depending on how long you were UK resident over the previous 20 years. The shortest IHT tail possible is three years, while individuals leaving the UK for the first time, for example to enjoy their retirement years in Portugal, retain their status for the full 10 years.
Review your estate plan and establish the most tax-efficient transfer of wealth to your heirs. Take both the UK and Portuguese rules into account to establish the most effective cross-border solution.
Returning to the UK and inheritance tax planning
Depending on how long you lived abroad, your non-UK assets could remain outside the scope of inheritance tax until you meet the long-term residence criteria, with a maximum of 10 years.
This new regime provides opportunities for effective succession planning for British expatriates returning to the UK. With strategic advance planning, you could potentially make the UK an IHT-free zone for up to 10 years.
Once you decide to move back, review your wealth management as soon as possible. Analyse where and how you hold your assets, reevaluate old and perhaps outdated estate planning arrangements, and look ahead at how assets will transfer down over the generations.
Returning to the UK and FIG regime tax benefits
The new system from April 2025 includes the ‘FIG’ regime for foreign income and gains. This tax benefit is available to individuals moving or returning to the UK after being non-UK resident for at least 10 years.
For the first four years of UK tax residence, your foreign income and gains could be tax free in the UK. This applies even if you remit the income into the country, provided it is generated from foreign assets. It does not apply automatically; you will need to make a claim for the FIG regime.
After four years, you will pay UK tax on worldwide income and gains, unless you leave the UK again before your fifth year of tax residence commences.
Tax and inheritance planning
With careful structuring of your assets, these new residence-based rules can unlock significant tax and estate planning advantages for British expatriates and those relocating to the UK. However, navigating the complexities of cross-border tax and succession laws requires expert guidance – it’s essential to seek advice from a cross-border wealth management specialist. They will help you comply with the legal requirements of each jurisdiction while optimising your arrangements to protect your wealth and secure your legacy.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
