Concept
UK inheritance tax (IHT) takes 40% of the value of an estate above the nil-rate band of £325,000. That threshold has been frozen at this level since 2009 and, following Budget 2025, will stay there until at least April 2031; a home passing to direct descendants adds a residence nil-rate band of £175,000. Freezing the bands while asset prices rise makes the tax steadily more widespread: in 2025/26 HMRC collected a record £8.5bn — its fifth record in a row. Trusts have historically been the main tool for smoothing IHT, but they answer to a tax regime of their own — relevant property — with its own charges.
2025 Reform: From Domicile to Residence
Technically, long-term resident status is counted in tax years, determined through the statutory residence test, and years before the reform count too. Domicile, intentions and citizenship no longer feature in the test — the arithmetic of 10 out of 20 does the work. For anyone under 20 the criterion is softer: residence in at least half of the tax years since birth.
Spousal relief has also been rebuilt. Transfers to a spouse who is a long-term resident are exempt without limit; transfers to a spouse without that status are capped at £325,000 over a lifetime. The way out is an election: the recipient spouse voluntarily treats themselves as a long-term resident, the relief becomes full, and in exchange their worldwide assets enter the orbit of IHT. The election ceases after ten consecutive years of non-residence.
"Tail" After Departure
Having left the UK, a former long-term resident stays within the orbit of IHT for another three to ten years. The length of the "tail" depends on tenure: three years at 10–13 years of residence, then one further year for each additional year of residence, reaching the full ten after 20 years. The date of departure becomes a calculated figure: one extra year of residence shifts the planning horizon by a year. We cover the mechanics of exit in the article on leaving the UK.
Relevant Property: Trust Regime
Assets in discretionary trusts are taxed under the relevant property regime: a 20% entry charge on the amount above the nil-rate band when assets pass into trust, a periodic charge of up to 6% every ten years, and an exit charge when assets are taken out. Since 6 April 2025 the reach is tied to the settlor's status on the date of the particular charge, and the date the trust was created decides less in itself: while the settlor is a long-term resident, the trust's worldwide assets sit inside the regime; once they cease to be, foreign assets leave it (usually with an exit charge).
Budget 2025 (26 November 2025) added a significant concession: for property that was excluded property on 30 October 2024 and sits outside the UK at the charge date, trustees can elect a cap — relevant property charges on it are limited to £5m per ten-year cycle (the new s.75B IHTA 1984, retroactive to 6 April 2025). For large legacy trusts the ceiling cost of holding the structure is now known in advance. New trusts, and trusts of settlors without prior non-dom status, pay without any limit.
Gifts and Insurance: The Classics Still Work
Lifetime gifts to individuals remain potentially exempt transfers: survive seven years and the gift drops out of the estate; death in the fourth to seventh year gives taper relief on the tax rate. A transfer into trust is a chargeable lifetime transfer with a 20% entry charge above the nil-rate band, and because of cumulation the sequence "trust first, then gifts" can cast a tax shadow up to 14 years back. Regular gifts out of current income (normal expenditure out of income) are exempt at once, without the seven-year wait — an underrated tool for high-income families.
Life insurance solves the adjacent problem — liquidity. A whole-of-life policy written into trust stays outside the estate and gives heirs the money to pay the 40% without a forced sale of property or a business; the premiums usually fit within the exemption for regular gifts out of income. More on this in the article on life insurance in succession planning.
Horizon 2027–2031
From here the IHT net stretches further. From 6 April 2027 unused pension funds (DC) and most death benefits are brought into the estate — on HMRC's estimate, adding some 10,500 taxpaying estates a year. The thresholds are frozen until April 2031, and the OBR expects the take to rise to around £14.5bn by 2030/31. For those who have moved to the UK, IHT works in tandem with the FIG regime on income and gains — residence planning is worth assembling as a whole, along both lines.
Practical Takeaway
For UK-connected families, trusts continue to work — succession planning simply calls for a recalculation under the residence-based regime: who in the family becomes a long-term resident and when, which assets sit in which trusts and with what dates, and where the liquidity for the 40% will come from. Those who have left should fix the length of their own "tail" and resist dismantling old excluded property trusts in haste: grandfathering and the £5m cap often make holding a structure cheaper than unwinding it.
🧭 Check your case: Succession Navigator — which law applies, where forced heirship and taxes arise.
This material is for reference purposes only and does not constitute individual legal advice.