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Consumer Discretionary
As the UK prepares for significant changes to Inheritance Tax (IHT) rules set to take effect in April 2025, financial advisers are sounding the alarm. The new regulations, aimed at simplifying and increasing tax revenue, are expected to affect nearly half of their clients, particularly those with international assets or complex estate structures.
One of the primary changes involves the shift from a domicile-based system to a residence-based system for IHT. This means that individuals who have been UK residents for 10 out of the last 20 years will be considered "long-term residents" and liable for IHT on their worldwide assets. Previously, non-domiciled individuals were only taxed on UK assets unless they had been resident for 15 out of the past 20 years[1][2]. This change is set to raise an additional £150 million annually by 2030[1].
Those who have met the 10-year residency condition will remain liable for IHT on their worldwide assets for up to 10 years after leaving the UK, depending on their total years of UK residence[4]. This "tail provision" is designed to prevent tax avoidance by relocating shortly before death.
In addition to these changes, the government has confirmed that the nil-rate band (£325,000) and residence nil-rate band (£175,000) will remain frozen until at least 2030[1]. This freeze, in the face of rising inflation and property values, means that more estates will be pulled into the IHT net over time, increasing the tax burden without raising rates[1][5].
Starting April 2026, farms and businesses valued above £1 million will face IHT for the first time. A £1 million combined allowance for APR and BPR will be introduced, with relief reduced to 50% for assets above this threshold[5]. These reforms aim to ensure that larger estates contribute more to public revenues.
Financial advisers are expressing concern about the complexity and impact of these changes on their clients. Many are seeing a surge in inquiries about how to mitigate IHT liabilities. Strategies such as gifting assets, using lifetime gifts, and leveraging double tax treaties for international clients are becoming increasingly popular[1][3].
For clients with international assets, particularly Americans living in the UK, the US-UK Treaty can provide significant protection against IHT. The treaty allocates taxing rights between the two countries based on treaty domicile, which may reduce UK IHT exposure for US treaty domiciled individuals[2]. Advisers are emphasizing the importance of understanding treaty domicile statuses to fully leverage these benefits.
With these changes on the horizon, advisers are urging clients to reassess their estate plans urgently. This includes understanding the new residency rules and exploring strategies to mitigate potential IHT liabilities.
As the UK continues to grapple with economic challenges, IHT reforms represent a significant shift in how wealth is taxed and transferred across generations. For individuals and families affected by these changes, seeking professional advice is crucial to navigate the evolving landscape of Inheritance Tax.
As the UK's IHT landscape undergoes significant changes, the impact on individuals and families is substantial. Advisers are bracing for a surge in client inquiries as people seek to minimize their IHT liabilities. Whether through strategic gifting, leveraging international treaties, or maximizing available reliefs, the time to act is now.
