UK Inheritance Tax and Offshore Assets: The 2025 Reforms Explained

UK Inheritance Tax: The Core Framework

Inheritance tax (IHT) in the United Kingdom is charged under the Inheritance Tax Act 1984 (IHTA 1984) on the transfer of value of a person's estate on death, and on certain lifetime transfers to trusts and other chargeable persons. The standard rate is 40% on the value of the estate above the nil-rate band (£325,000 as of 2025/26, unchanged since 2009/10).

Residence of the deceased is largely irrelevant for IHT purposes — what matters is domicile. A UK-domiciled individual is subject to IHT on their worldwide assets, regardless of where those assets are located. A non-domiciled individual is, in principle, subject to IHT only on UK-situated assets.

Before April 2025, the system had one significant overlay on this principle: the "deemed domicile" rule in section 267 IHTA 1984, which treated a long-term UK resident as domiciled in the UK for IHT purposes even if they had not acquired a domicile of choice in the UK under general law. The deemed domicile threshold was 15 years of UK residence in the preceding 20 tax years.

The April 2025 reforms changed this test fundamentally.

The April 2025 Change: Long-Term UK Resident Test

From 6 April 2025, section 267 IHTA 1984 is replaced by a new "long-term UK resident" (LTUR) test. An individual is a long-term UK resident — and therefore subject to UK IHT on worldwide assets — if they have been UK tax resident in at least 10 of the preceding 20 tax years.

This is a materially lower threshold than the previous 15-of-20 test. Under the old rules, a non-domiciliary needed to accumulate 15 years of UK residence before becoming deemed domiciled. Under the new rules, the IHT exposure begins at the 10-year point.

The practical impact is that non-domiciliaries who have been UK resident for between 10 and 14 years — who were outside the old deemed domicile threshold — now face UK IHT on worldwide assets. For someone who arrived in the UK in 2012, the new rules mean they became an LTUR from April 2022 under the 2025 calculation — their global estate is now within the UK IHT charge.

Rule	Threshold	Years of UK Residence Required
Pre-April 2025: Deemed domicile	15 of preceding 20 tax years	15 years
From April 2025: Long-term UK resident	10 of preceding 20 tax years	10 years

The Ten-Year Tail for Departing LTURs

A person who ceases to be UK tax resident remains subject to UK IHT as an LTUR until they have been non-resident for a sufficient number of years to drop below the 10-of-20 threshold. This "tail" period can be up to 10 years after departure, depending on how many years of prior residence the individual accumulated.

For example, an individual who was UK resident from 2010 to 2025 (15 years) and departs in 2025 remains an LTUR until 2026 under the 10-of-20 test (they will have 10 of the 20 years ending in 2026 as residence years). They drop below the LTUR threshold from April 2026, assuming no return to the UK.

By contrast, someone who was UK resident for 20 of the 20 years before departure would have a 10-year tail before clearing the test. The tail creates a long period of ongoing IHT exposure on worldwide assets for long-term UK residents who depart in later life.

Offshore Trusts and Excluded Property: The New Framework

The most significant planning impact of the April 2025 reforms is on offshore trusts. Under the pre-2025 position, an offshore trust settled by a non-domiciliary (before they became deemed domiciled) could qualify as an "excluded property" trust under section 48(3) IHTA 1984. Assets held in an excluded property trust are outside the scope of UK IHT — the ten-year anniversary charges and exit charges that apply to relevant property trusts do not apply.

From April 2025, excluded property status for offshore trusts depends on whether the settlor is an LTUR at the relevant time. A trust that was settled by a non-domiciliary and held excluded property retains that status only if:

• The settlor is not an LTUR at the date of the relevant IHT event (ten-year anniversary, exit, or death)
• The assets in the trust are not UK-situated assets

This means that an individual who settled an offshore trust when they had only eight years of UK residence (historically safe under the 15-of-20 rule) may now find that the trust is within the IHT charge from April 2025 onwards — because they have now reached the 10-year LTUR threshold and the excluded property protection falls away.

Trusts Settled Before 30 October 2024: Transitional Protection

The Autumn Budget 2024 confirmed transitional protections for trusts settled before 30 October 2024. Under these transitional rules:

• Excluded property trusts settled before 30 October 2024 retain their excluded property status for IHT purposes until 5 April 2026
• From 6 April 2026, the LTUR test applies to those trusts in the same way as trusts settled after 30 October 2024

This transitional period is limited. Trustees and advisers of offshore trusts settled before October 2024 should urgently review whether the April 2026 change creates an IHT exposure and whether restructuring is appropriate before that date.

IHT on Foreign Assets for Former Long-Term UK Residents

One of the most punishing aspects of the LTUR tail provision is the continuing IHT exposure on foreign assets held by individuals who have left the UK. A German citizen who lived in the UK from 2005 to 2023 (18 years), returned to Germany in 2023, and dies in 2026 is still an LTUR at the date of death (they have more than 10 of the preceding 20 years as UK residence years). Their worldwide estate — German family business shares, German property, Swiss bank accounts — is subject to UK IHT.

This is a material risk that is widely misunderstood. Many former UK residents assume that departure from the UK ends their UK tax obligations. For income tax and CGT purposes, that is broadly correct once the temporary non-residence period has elapsed. For IHT, the LTUR tail means the UK charge continues for up to 10 years post-departure.

The interaction with double tax treaties is complex. The UK has bilateral IHT treaties with only a small number of countries: France, Republic of Ireland, Italy, India, Netherlands, Pakistan, South Africa, Sweden, Switzerland, and the USA. A former UK resident who dies as a German resident with a worldwide estate will have no treaty protection — German IHT and UK IHT can both apply.

Planning Strategies Before and After April 2025

Pre-Departure Planning

For non-domiciliaries approaching their tenth year of UK residence, the most effective IHT planning strategy is departure before the LTUR threshold is crossed. An individual with nine years of UK residence who departs in the current tax year will never become an LTUR (assuming they do not return), and their worldwide estate — including offshore assets and any offshore trusts they have settled — remains outside UK IHT indefinitely.

Genuine departure requires meeting the Statutory Residence Test non-residence conditions, which is addressed in our guide to the UK SRT.

Post-Departure Tail Management

For individuals who have already passed the 10-year threshold and are considering departure, the priority is to understand the length of the tail and plan accordingly. An individual with exactly 10 years of UK residence out of the last 20 will clear the LTUR test in the year immediately after departure (provided no further UK residence years are added). An individual with 19 of 20 years will have a near-10-year tail.

During the tail, IHT exposure on worldwide assets continues. Life insurance written in trust (outside the estate) can provide liquidity for an IHT charge that may arise unexpectedly. Specific asset exemptions — Business Property Relief, Agricultural Property Relief — may shelter some assets, but BPR is subject to a £1 million cap from April 2026.

Offshore Trust Review

Every offshore trust settled by a UK resident non-domiciliary should be reviewed in light of the April 2025 changes. The key questions are: Is the settlor now an LTUR? If so, when did they become one? What are the ten-year anniversary dates for the trust? Does any restructuring — including winding up the trust and distributing capital before the next charge date — make more economic sense than continued operation?

HPT Group advises trustees and settlors on offshore trust IHT analysis, the impact of the long-term resident test on existing structures, and the planning options available during the transition window. For an assessment of your trust's position under the new rules, contact our international tax team or book a consultation.