By Dr Angelo Chirulli ACA BFP ADIT CPA (Ita)
Mail: angelo@vectigalistax.co.uk
Navigating the new Residence‑based rules
From April 2025 the UK’s inheritance tax (IHT) system moved from a domicile‑based framework to a residence‑based regime. This shift means that individuals who meet the definition of a long‑term UK resident will be exposed to IHT on worldwide assets sooner than before. Understanding when assets are treated as excluded property—and therefore outside the scope of IHT—is now critical for families and trustees with cross‑border connections. This article, written from a professional adviser’s perspective, explains the new rules for individuals, settlements and reversionary interests and highlights practical points for managing your estate.
Long‑term residence versus domicile
Under the residence‑based regime, a person becomes a long‑term UK resident if they have been UK resident for either the previous ten consecutive tax years or for ten or more tax years within the preceding 20 years[1]. Once you acquire this status, the UK can tax transfers of your overseas assets on lifetime gifts or at death[2]. Even after leaving the UK, long‑term residents can remain within the IHT net for three to ten years depending on how long they lived in the UK[3].
If you are not a long‑term UK resident, your non‑UK assets generally remain outside the scope of IHT—these are excluded property. Therefore, both residence history and the location of assets determine liability: UK‑situated assets are always taxable; overseas assets are excluded unless the individual meets the long‑term residence test.
Excluded property for individuals
Property located outside the UK is excluded property if the person beneficially entitled to it is not a long‑term UK resident[4]. For gifts, what matters is the transferor’s residence status at the date of the gift. For example, if a UK‑resident individual gives a foreign holiday home to a child while they meet the long‑term resident test, the gift is not excluded and will become chargeable if the donor dies within seven years. Conversely, a gift made while the donor is not a long‑term resident is excluded.
Holdings in authorised unit trusts and open‑ended investment companies located overseas are also treated as excluded property when the beneficial owner is not a long‑term UK resident. Certain government securities issued subject to residency conditions and decorations or awards that have never been sold also fall outside the IHT charge. Members of overseas armed forces stationed in the UK benefit from exclusion for their pay and personal chattels if they are not British citizens. However, UK residential property interests held through offshore structures are brought within scope under the ‘non‑excluded overseas property’ rules, so foreign companies holding UK homes do not avoid IHT.
Excluded property for settlements
Trusts established by or for non‑UK residents have long been a planning tool. Under the new rules, foreign assets in a settlement are excluded property only while the settlor is not a long‑term UK resident. If the settlor becomes long‑term resident, the foreign assets enter the UK relevant property regime and become subject to ten‑year anniversary and exit charges.
Similarly, when a chargeable event (e.g., a ten‑year anniversary) occurs after 6 April 2025, foreign settled assets will be excluded property if the settlor was not a long‑term UK resident at that time. Assets can therefore move in and out of charge depending on the settlor’s residence status at each event. Settled property is excluded on the settlor’s death if they were not long‑term resident immediately before death; if the settlor died before April 2025, the pre‑existing domicile rules apply[5].
Where a beneficiary has a qualifying interest in possession(life interest) in a trust, foreign assets will be excluded from 6 April 2025 if the life tenant is not a long‑term UK resident. Anti‑avoidance rules prevent property from being treated as excluded if an individual acquires an interest in possession for consideration after 5 April 2005 or if complex arrangements circumvent the residence tests; in those cases, the settlement is treated as UK‑resident and becomes subject to relevant property charges.
Example: when excluded property becomes chargeable
Imagine a settlor placed a foreign commercial property into a discretionary trust in 2007 when they were non‑UK domiciled. The property was excluded property at the outset. If the settlor becomes a long‑term UK resident before the trust’s second ten‑year anniversary in 2027, the foreign property will cease to be excluded and a proportionate charge will arise for the period during which the settlor was long‑term resident. This demonstrates why monitoring residence status is critical for trustees and donors.
Reversionary interests
A reversionary interest is a future interest under a settlement. It is treated as a separate item of property and is normally excluded from IHT, regardless of residence, subject to exceptions. HMRC guidance explains that an unsettled reversion (one not held in trust) is excluded property if the transferor is not a long‑term UK resident for transfers on or after 6 April 2025[6]. For a settled reversion, the interest is excluded if the settlor is not a long‑term UK resident at the time the reversion is comprised in the settlement or immediately before death[6]. The location of a reversionary interest normally follows the residence of the trustees of the underlying settlement[7].
Exceptions apply: a reversionary interest purchased for money, or where the settlor or their spouse retains the interest, will not be excluded property. In those cases the interest is treated like UK property and may attract IHT charges. As with other trusts, the anti‑avoidance provisions can override excluded property status where arrangements are made to secure favourable treatment artificially.
Planning considerations
1. Track your residence history: The long‑term residence test is mechanical: once you accumulate ten UK tax years in a 20‑year window, worldwide assets become taxable[1]. Exiting the UK does not immediately remove exposure—plan for the inheritance tax “tail” of three to ten years[3].
2. Review offshore assets and trusts: Overseas property may be excluded now but could become chargeable if you later qualify as long‑term resident. Trustees should monitor the settlor’s residence status ahead of ten‑year anniversaries and exits.
3. Document reasons for owning assets overseas: Keeping evidence of commercial or personal motivations for holding assets abroad can help demonstrate that structures are not artificial. This is particularly important where trusts or companies hold UK residential property, which falls into the ‘non‑excluded overseas property’ rules.
4. Consider succession and liquidity: The earlier exposure to IHT means wealth holders need to plan for potential tax on worldwide estates sooner. Life assurance, gifting strategies and restructuring may help manage future liabilities.
How we can assist
The new residence‑based IHT rules introduce nuanced tests and transitional provisions that affect individuals and trusts differently. Navigating these rules requires careful analysis of residence, domicile, asset location and trust structures.
At Vectigalis Tax, we specialise in cross‑border estate and succession planning. We can review your asset portfolio, advise on the long‑term residence test, assess whether property is excluded or chargeable, and design strategies to manage exposure.
For personalised advice, visit www.vectigalistax.co.uk or email angelo@vectigalistax.co.uk. Early planning ensures your legacy is protected while complying with evolving tax rules.
[1] [2] [4] [5] Inheritance Tax if you’re a long-term UK resident – GOV.UK
[3] The scope of inheritance tax: a new residence-based system | Tax Adviser
[6] [7] IHTM27230 – Foreign property: property excluded from Inheritance Tax: reversionary interests – HMRC internal manual – GOV.UK