Domicile and Inheritance Tax UK (2026): How Domicile Determines Your IHT Liability

Domicile is the fundamental connecting factor that determines whether the UK can charge IHT on your worldwide assets or only your UK-situated assets: (1) UK DOMICILED — WORLDWIDE ASSETS TAXED: a person who is domiciled in the UK is subject to IHT on their WORLDWIDE ASSETS. The entire global estate — UK and foreign property, bank accounts, investments, businesses — is within the scope of UK IHT at 40% above the available nil-rate band. This applies regardless of where the person is resident at the date of death; (2) NON-UK DOMICILED — UK ASSETS ONLY: a person who is NOT domiciled in the UK is, in principle, only subject to UK IHT on their UK-SITUATED (UK situs) ASSETS. Foreign assets are EXCLUDED PROPERTY under IHTA 1984 s.6 and fall outside the scope of UK IHT. This is a significant advantage for non-doms with large overseas estates; (3) WHAT IS DOMICILE: domicile is a legal concept distinct from nationality, citizenship, and tax residence. There are three types: (a) DOMICILE OF ORIGIN: acquired at birth — the domicile of your father (if parents married) or your mother (if unmarried) at the date of your birth. Most UK-born people have a UK domicile of origin; (b) DOMICILE OF CHOICE: acquired by moving to a foreign country with the INTENTION of settling there permanently or indefinitely and giving up the UK domicile. Very difficult to acquire — courts look for settled intention, not just physical presence. Many long-term UK residents retain their UK domicile of origin even after years abroad; (c) DOMICILE OF DEPENDENCY: children under 16 take their father's (or in some cases mother's) domicile. Not relevant to most adults; (4) UK SITUS ASSETS (RELEVANT FOR NON-DOMS): UK-situated assets include: (a) UK land and buildings; (b) shares in UK companies; (c) UK bank accounts; (d) assets physically located in the UK; (5) EXCLUDED PROPERTY: foreign property held by a non-UK domiciliary is EXCLUDED PROPERTY under IHTA 1984 s.6 — outside the scope of UK IHT. From April 2025, this exclusion is subject to the new long-term UK resident rules (see Q2).

From 6 April 2025, the UK overhauled the non-domicile rules across income tax, CGT, and IHT as part of the Autumn Budget 2024 changes. The IHT changes are the most structurally significant: (1) THE OLD DEEMED DOMICILE RULE (PRE-APRIL 2025): under the rules that applied until 5 April 2025, a non-UK domiciliary became 'deemed domiciled' in the UK for IHT purposes after being UK resident for 15 of the past 20 tax years. At that point, all worldwide assets became subject to UK IHT — as if the person had a UK domicile; (2) THE NEW LONG-TERM UK RESIDENT RULE (FROM APRIL 2025): from 6 April 2025, the deemed domicile concept for IHT is REPLACED by a new 'long-term UK resident' (LTUR) test: (a) A person becomes a LTUR for IHT after being UK resident for 10 or more of the past 20 tax years. From that point, their WORLDWIDE ASSETS are within the scope of UK IHT — including assets that were previously excluded property under a non-dom trust; (b) The threshold is LOWER than the old 15/20 rule — it triggers at 10 years, not 15. This brings more people into the scope of worldwide IHT sooner; (3) TAIL CHARGE — LEAVING THE UK: when a LTUR leaves the UK, they do NOT immediately escape worldwide IHT on departure: (a) if a person has been UK resident for 10-19 years: a 'tail' period of 10 years continues to apply. Worldwide assets remain in scope for 10 years after leaving; (b) if a person has been UK resident for 20 or more years: the tail period is the same as the number of years of UK residence (up to a maximum); (c) the tail period is intended to prevent leaving the UK as a last-minute IHT mitigation strategy; (4) TRANSITIONAL PROTECTIONS: persons who were non-UK domiciliary under the old rules and had been UK resident for 10-14 years as of 6 April 2025 have transitional protections — specialist advice is essential; (5) EXCLUDED PROPERTY TRUSTS: assets in excluded property trusts settled before the settlor became a LTUR continue to be excluded property — BUT assets added to such trusts AFTER the settlor becomes a LTUR are not excluded. Specialist trust advice is essential for non-doms with offshore trusts.

The interaction between the UK spousal exemption and non-domicile status has long been an important IHT planning area: (1) THE STANDARD SPOUSAL EXEMPTION (IHTA 1984 s.18): transfers between spouses (or civil partners) are IHT-exempt. Gifts on death pass free of IHT to the surviving spouse — there is no upper limit; (2) THE NON-DOM RESTRICTION (IHTA 1984 s.18(2)): the UNLIMITED spousal exemption only applies if the RECIPIENT spouse is UK domiciled. If the recipient spouse is NOT UK domiciled, the spousal exemption is CAPPED at £325,000 (the nil-rate band amount). Gifts above £325,000 to a non-dom spouse are taxed at 40% on the excess; (3) THE NON-DOM SPOUSE ELECTION (IHTA 1984 s.267ZA): a non-UK domiciled spouse can ELECT to be treated as UK domiciled for IHT purposes. This election: (a) gives the full unlimited spousal exemption on transfers from the UK domiciled spouse; (b) means the non-dom spouse's worldwide assets are then subject to UK IHT; (c) is irrevocable for a period — once made, it cannot easily be unwound; (d) must be made during the deceased's lifetime or within 2 years of death; (4) FROM APRIL 2025 — LONG-TERM RESIDENT SPOUSE: under the new LTUR rules, the restriction on the spousal exemption for non-dom spouses continues. A spouse who is not a LTUR and has a foreign domicile remains subject to the restricted exemption. The election mechanism continues under the new regime (with modifications — specialist advice needed); (5) IMPORTANCE FOR WILL PLANNING: a UK-domiciled spouse with a non-dom spouse should consider: (a) whether to make a large gift to the non-dom spouse (triggering the restricted exemption); (b) whether the non-dom spouse should make the s.267ZA election; (c) how excluded property trusts can be used on the non-dom spouse's death.

Excluded property trusts have historically been a key IHT planning tool for non-doms — allowing offshore assets to be held outside UK IHT even after the settlor became deemed domiciled: (1) WHAT IS AN EXCLUDED PROPERTY TRUST: a trust settled by a non-UK domiciliary (before they became deemed domiciled / LTUR) holding non-UK assets. The assets in the trust are 'excluded property' under IHTA 1984 s.48(3)(b) — outside the scope of UK IHT, regardless of whether the settlor subsequently becomes UK domiciled or LTUR; (2) THE PRE-APRIL 2025 POSITION: under the old rules, a non-dom could settle assets into an offshore trust BEFORE becoming deemed domiciled (i.e. before 15 years of UK residence). Those trust assets remained excluded property EVEN AFTER the settlor became deemed domiciled — a significant planning advantage; (3) THE POST-APRIL 2025 POSITION: from 6 April 2025, important changes apply: (a) excluded property trusts settled BEFORE the settlor became a LTUR continue to hold excluded property status for assets already in the trust — the 'grandfathering' protection broadly continues; (b) ADDITIONS to the trust AFTER the settlor becomes a LTUR are NOT excluded property — they form part of the relevant property regime; (c) the government's technical legislation has been complex — specialist advice is essential for offshore trust structures; (4) UK RESIDENTIAL PROPERTY — NOT EXCLUDED: UK residential property held through offshore companies or partnerships is NOT excluded property following the Finance Act 2017 changes. It is subject to UK IHT through the ATED and associated changes. Non-doms cannot use offshore structures to shelter UK residential property from IHT; (5) ANNUAL CHARGES: offshore trusts in the relevant property regime face periodic charges (10-year anniversary; 6%) and exit charges — even if the assets are held offshore. The trustee must file and pay UK IHT on these charges.

Given the complexity of the post-April 2025 rules, non-doms and long-term UK residents should take immediate advice: (1) COUNT YOUR YEARS OF UK RESIDENCE: determine whether you have been UK resident for 10 or more of the past 20 tax years. If yes, you are (or will shortly become) a LTUR and your worldwide assets are within the scope of UK IHT. This is the threshold that determines your IHT exposure; (2) MAP YOUR WORLDWIDE ASSETS: list all worldwide assets — UK and non-UK — with valuations. Identify which are potentially subject to UK IHT (as a LTUR) and which remain excluded property. Distinguish between: (a) assets in excluded property trusts settled before you became a LTUR; (b) other offshore assets now in scope; (c) UK situs assets (always in scope); (3) REVIEW EXCLUDED PROPERTY TRUSTS: if you have an offshore trust settled before becoming a LTUR, take immediate specialist advice on: (a) whether assets in the trust are still protected; (b) whether the trust structure needs amending in light of the April 2025 changes; (c) the impact of any recent additions; (4) REVIEW YOUR WILL: a non-dom's will must deal with worldwide assets. If you have a foreign domicile of choice, consider: (a) whether a UK will and a foreign will are needed; (b) which law governs succession to your foreign assets (EU Succession Regulation — Brussels IV — may apply for EU assets); (c) the situs of each asset and which jurisdiction's succession laws apply; (5) CONSIDER THE UK NRB AND AVAILABLE RELIEFS: even as a LTUR, the nil-rate band (£325,000), residence nil-rate band (£175,000 if applicable), BPR, and APR still reduce the IHT charge on your estate. Map the available reliefs against your UK-exposed estate; (6) TAKE SPECIALIST ADVICE: the domicile and LTUR rules are among the most complex in UK tax law — and have changed significantly. Annual changes to the non-dom regime mean planning strategies from 2023 or earlier may no longer be effective. Specialist private client tax advice is essential.