Concept
UK inheritance tax (IHT) is charged at 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 reducing the IHT burden, 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 10-out-of-20 calculation applies. 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 come within IHT. The election ceases after ten consecutive years of non-residence.
Continuing Taxation After Departure
Having left the UK, a former long-term resident remains subject to IHT for another three to ten years. The duration of continuing taxation depends on the period of residence: 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. The mechanics of departure are covered in the article on leaving the UK.
Relevant Property: Trust Regime
The relevant property regime charges tax at three stages; its scope depends on the settlor's status.
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, new s.75B IHTA 1984, retrospective to 6 April 2025, automatically caps relevant property charges at £5m per ten-year cycle. Trustees do not elect this cap: it applies by statute when its conditions are met. 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 that cap.
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 produce tax consequences looking back up to 14 years. 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
The scope of IHT is expanding. 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 — it is advisable to consider both regimes together when planning residence.
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.
Compared with other destinations, the UK is one of the few systems that taxes the trust itself on a ten-year cycle: the guide to relocating with a trust sets its arrival and departure rules against eleven other countries, from Italy, Germany and Switzerland to the UAE, which has no personal income tax, and the guide to trust taxation compares how the same trust is taxed in steady state in each country of residence. For the estate itself, the inheritance-tax comparison places the 40% rate and the £325,000 band beside thirteen other regimes.
Q/A
My domicile has never been British. Does the 2025 reform reach me at all?
It does. Since 6 April 2025 domicile is not a criterion for IHT: long-term resident status attaches to anyone who has been UK tax-resident for at least 10 of the previous 20 tax years (s.6A IHTA 1984). Years before the reform count too, and intentions and citizenship no longer feature in the test.
I have left the UK. How many years until my worldwide assets fall out of IHT?
Between three and ten, depending on tenure. At 13 years of residence or fewer you need three consecutive non-resident tax years, at 14 years four, then one more year for each additional year of residence, reaching the full ten at 20 years (s.6A IHTA 1984). Until then worldwide assets stay in charge.
My wife is not a long-term resident. Is it true I can only pass her £325,000 tax-free?
Yes, where the transferor is a long-term resident and the recipient spouse is not: the exemption in s.18(2) IHTA 1984 is capped at the nil-rate band figure, £325,000 over a lifetime. The way round it is an election under s.267ZC — the spouse is treated as a long-term resident, the relief becomes unlimited, and their worldwide assets come into IHT.
I have an excluded property trust from 2019. Should I unwind it or keep it?
Usually keep it. Property that was excluded property on 30 October 2024 and sits outside the UK at the charge date falls under the cap in s.75B IHTA 1984: relevant property charges on it are limited to £5m per ten-year cycle, and in the first period to £125,000 for each whole quarter from 6 April 2025. The cap applies by statute, not by election.
I want to help my children regularly with money. Do I have to wait seven years?
Not necessarily. Regular gifts out of current income are exempt immediately, but s.21 IHTA 1984 requires all three conditions: the gift forms part of the transferor's normal expenditure, it is made out of income, and after all such gifts the transferor is left with enough income to maintain their usual standard of living. A one-off gift out of capital stays a PET.