The new concept of Long-Term Residence replaced the long-standing domicile-based approach and sits alongside the well-established Statutory Residence Test. While they both assess an individual’s connection to the UK, they serve distinct purposes and have different implications for income tax, capital gains tax and inheritance tax.
While most UK tax reforms over recent years can have a negative impact on wealth, the introduction of Long-Term Residence stands out as a welcome move for many. Long-term expatriates and those returning to the UK could greatly benefit if they plan their affairs strategically.
The Statutory Residence Test (SRT): annual residency status
The Statutory Residence Test, introduced in 2013, determines whether you are UK tax resident in a given tax year. It is structured around three key tests which you work through in order. If you are non-UK resident under the first one, the other two do not apply. In summary:
- Automatic Overseas Test – You are non-UK resident if you spend fewer than 16 days if previously resident over the last three years, or fewer than 46 days if you have been non-resident for longer, as well as if you work full-time abroad with limited UK presence.
- Automatic UK Test – You are resident if you spend 183+ days in the UK, your only home is in the UK, or you work full-time in the UK.
- Sufficient Ties Test – If neither of the above applies, this test considers your UK ties (family, accommodation, work, etc.) and number of days in the UK.
The SRT is applied annually and determines whether you are taxed on worldwide income and gains or only UK-sourced income. The one exception is for foreign income and gains for those who are tax resident but not long-term resident.
The new Long-Term Residence (LTR) Rules: A game-changer for inheritance tax
From April 2025, the UK replaced its domicile-based approach to inheritance tax with a residence-based system. You are now considered a Long-Term Resident if you have been UK tax resident for at least 10 of the previous 20 tax years. The key implications of Long-Term Residence status include:
- Inheritance tax: Anyone classified as Long-Term Resident is liable to UK IHT on worldwide assets.
- Tail period: Once you have left the UK, you retain your LTR status – and remain within the scope of UK IHT – for up to 10 years, depending on how long you were previously resident.
- Long-term expatriates: Once you are non-UK resident for 10 years, your IHT liability is limited to assets in the UK.
- Foreign income and gains (FIG): Anyone moving to the UK who is non-long-term resident can benefit from a tax exemption on foreign income and gains for up to four years.
Why this matters
If you are relocating or spend significant time in UK and Portugal, understanding both the SRT and LTR rules is essential for tax and estate planning.
- You can only be a tax resident in one country at a time and cannot choose where to pay annual taxes. Your tax residence is determined by the UK Statutory Residence Test and Portugal’s residency rules. If you live in Portugal and earn income in the UK, follow the double tax treaty to establish where you must declare the income and pay tax.
- When it comes to inheritance tax, long-term British expatriates no longer need to worry about the uncertainty of the domicile regime. After 10 years of non-UK residence, assets outside the UK do not fall within the scope of inheritance tax.
- It is advisable for long-term expatriates to reassess which, if any, UK assets they need to retain. From 2027, your UK pension funds will form part of your estate for IHT purposes, along with any other UK assets. Anything over €325,000 per individual is taxed at 40%.
- If you return to the UK after 10 years of non-residence, your non-UK assets will remain outside UK IHT for 10 years. Review and restructure your assets before returning to fully benefit from the new system.
- When moving back to the UK, you may also benefit from a four-year exemption on foreign income and gains under the new Foreign Income and Gains regime.
Whether you already live in Portugal, or are planning to relocate, review your residency history, reassess your structures and seek expert advice. The earlier you act, the more options you’ll have to protect your wealth and legacy.
The introduction of Long-Term Residence marks a new chapter for UK inheritance planning and presents opportunities for protecting your family and heirs. Specialist cross-border wealth management advice, structured around your family circumstances and wishes for your loved ones, will prove invaluable.
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.
Read Dan Henderson last article: Taxing times ahead? Seven areas the Chancellor may target in the UK Budget
