Inheritance Tax Planning for UK Expats

Inheritance Tax is one of the most commonly misunderstood aspects of UK financial planning for expats. Many UK nationals assume that once they have left the UK and established themselves abroad, UK IHT no longer applies. For most, this assumption is wrong — and the consequences of that misunderstanding can be a very large, entirely avoidable tax bill on their estate.

This guide sets out the IHT position for UK expats, explains the main reliefs and exemptions available, and outlines the planning strategies most commonly used to manage the exposure.

IHT and the long-term residence test: who is caught

UK Inheritance Tax applies at 40% on the worldwide assets of any individual who is within scope at death (or when a gift is made, for a chargeable lifetime transfer). The 40% rate applies above the nil rate band (£325,000 in 2026/27, potentially increased by the residence nil rate band).

Until 5 April 2025, scope was determined by domicile (and the "deemed domicile" rule for long-term UK residents). From 6 April 2025, the domicile concept was abolished for IHT and replaced by a residence-based long-term resident (LTR) test. This was one of the most significant changes to the IHT regime in a generation, and it changed who is exposed to IHT on their worldwide estate.

The long-term resident test

Under the LTR test, an individual is within scope of UK IHT on their worldwide estate if they have been UK resident for at least 10 of the last 20 tax years. An individual who does not meet that test is only exposed to UK IHT on their UK-situated assets — non-UK assets are excluded property.

This catches many long-term expats who are no longer resident in the UK but have a recent history of UK residency, and it now turns on residence (an objective, statutory test) rather than the older, fact-sensitive concept of domicile.

The "tail" after leaving the UK

Becoming non-resident does not immediately remove you from scope. Once you are a long-term resident, worldwide assets remain within the IHT net for a "tail" after departure — ranging from 3 years (for those resident 10–13 of the last 20 years) up to 10 years (for those resident 20 years). Planning around the LTR threshold and its tail — including the timing of departure and the creation of excluded property trusts before becoming a long-term resident — needs to be done well in advance.

Note: references in older guidance to "domicile of origin", "domicile of choice", "deemed domicile" and the "15 of 20 years" rule reflect the position up to 5 April 2025. They no longer determine IHT exposure, although domicile remains relevant in limited contexts (for example, certain pre-April 2025 trust structures).

The nil rate bands

Two nil rate bands currently reduce IHT exposure:

Nil Rate Band (NRB): £325,000 per individual. This amount has been frozen at this level since 2009 and is currently expected to remain frozen until April 2031, effectively increasing the real cost of IHT through fiscal drag. Any NRB unused on the first death in a married couple is transferable to the surviving spouse, potentially doubling it to £650,000.

Residence Nil Rate Band (RNRB): An additional £175,000 per individual where a main residence (or the equivalent value in assets) passes to direct descendants (children, grandchildren). This band tapers away for estates over £2 million. Combined, a married couple can potentially shelter up to £1 million from IHT — but only where the conditions are met.

For expats who do not own UK residential property, the RNRB may not be available, reducing the effective exemption.

Excluded property

A significant relief for individuals who are not long-term residents is the excluded property rule. Non-UK situated assets held by someone who is not yet a long-term resident are excluded from the IHT estate. Structuring assets to sit outside the UK — in offshore investment accounts, offshore bonds, or assets held in jurisdictions other than the UK — reduces the IHT exposure for those individuals while they remain outside the long-term resident test.

For those who have set up excluded property trusts (see trusts guide), trust assets settled before the settlor became a long-term resident can remain outside the UK IHT net. Following the April 2025 reforms the excluded property status of these trusts is now linked to the settlor's long-term resident status rather than domicile, and new contributions after a settlor has become a long-term resident may not qualify — so timing of the settlement and any additions is critical, and existing structures should be reviewed.

Gifts: the seven-year rule

Lifetime giving is the most accessible IHT mitigation tool available to anyone, regardless of domicile:

Potentially exempt transfers (PETs): a gift to an individual is a PET. If the donor survives seven years after the gift, the PET becomes fully exempt from IHT. If death occurs within seven years, taper relief reduces the IHT charge:

• Death in years 1–3 after gift: 40% IHT applies
• Death in years 3–4: 32%
• Death in years 4–5: 24%
• Death in years 5–6: 16%
• Death in years 6–7: 8%
• After 7 years: fully exempt

Annual exemption: £3,000 per year of gifts is immediately exempt from IHT. Any unused annual exemption from the previous year can be carried forward, allowing up to £6,000 of immediately exempt gifts in year two.

Small gifts: gifts of up to £250 per individual recipient per year are immediately exempt.

Marriage gifts: gifts made on the occasion of a marriage or civil partnership attract specific exemptions: £5,000 from a parent, £2,500 from grandparents, £1,000 from any other person.

Gifts out of normal income

Gifts made from surplus income — income that is genuinely surplus to the donor's normal expenditure — can qualify as immediately exempt from IHT with no seven-year wait. The conditions are:

1. The gift must come from income (not capital)
2. The gifts must form part of the donor's normal expenditure (regular, habitual pattern)
3. After making the gift, the donor must be left with sufficient income to maintain their usual standard of living

This exemption can be very valuable for high-income individuals. A regular premium into a life policy written in trust for children, for example, may qualify if funded from surplus income. Detailed records of income, expenditure, and the pattern of gifting are essential to support a claim.

Spousal exemptions and the non-domiciled spouse issue

The unlimited spousal exemption — transfers between spouses are free of IHT — does not apply in full where the transferor is within scope on worldwide assets but the receiving spouse is not a UK long-term resident. In this case, the spouse exemption is limited to an amount equal to the nil rate band (£325,000). Amounts above this are not exempt. (Before 6 April 2025 this restriction was framed by reference to the receiving spouse's domicile rather than long-term residence.)

The receiving spouse can elect to be treated as a long-term resident for IHT purposes, which restores the unlimited exemption. However, this election also brings that spouse's worldwide assets within UK IHT — a trade-off that requires careful analysis.

Life assurance in trust

A common and effective way to manage an IHT liability — rather than reduce it — is to take out life assurance designed to pay the IHT bill on death. By writing the policy in trust, the death benefit:

• Passes directly to the trustees on death, not into the estate
• Is therefore not itself subject to IHT
• Is available immediately to the trustees without waiting for probate
• Can be used to pay the IHT liability, preventing the forced sale of illiquid assets (property, business interests, investments with exit charges)

The premium itself is paid from income and, if it meets the gifts-from-normal-income conditions, may also be immediately IHT-exempt.

Offshore whole-of-life policies and term assurance can be structured specifically for IHT purposes.

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This article is for general information only and does not constitute tax or legal advice. IHT rules are complex, change regularly, and their application depends on individual circumstances. Always seek advice from a qualified tax adviser and solicitor before making estate planning decisions.

How Global Investments can help

Global Investments advises UK expat clients on IHT planning as part of a comprehensive estate planning service. We help identify exposure, assess the timing of excluded property trust creation, coordinate life assurance in trust arrangements, and work alongside specialist solicitors and tax advisers to deliver a complete IHT plan. Contact our team or read our guide on estate planning for expats.