IHT Tax Changes from April 2025 – Key Updates

Recent budget announcements have introduced significant changes to Inheritance Tax (IHT), effective from 6 April 2025. This article outlines the key updates and their potential impact.

IHT and Residence Status

Currently, IHT is based on domicile status. Non-UK domiciled individuals are only subject to IHT on their UK assets, while UK-domiciled individuals are taxed on their worldwide assets.

From 6 April 2025, IHT will shift to a residence-based system. Individuals classified as long-term residents will be liable for IHT on their worldwide assets. A long-term resident is someone who has been a UK resident for at least 10 out of the last 20 tax years.

For individuals under 20 years old, they will be considered long-term residents if they have spent at least 50% of their lifetime in the UK.

IHT "Tail" Period for Departing Residents

Long-term residents who leave the UK will remain within the IHT net for a period known as the tail. The length of the tail depends on their previous period of UK residence:

• Fewer than 10 years – No tail period

• 10–13 years – 3 tax years

• 14 years – 4 tax years

• 15 years – 5 tax years

• 16 years – 6 tax years

• 17 years – 7 tax years

• 18 years – 8 tax years

• 19 years – 9 tax years

• 20 years or more – 10 tax years

The tail period resets once an individual has been non-resident for 10 consecutive years.

Transitional Rules

For non-domiciled individuals as of 30 October 2024 who are non-resident from 2025/26, the current deemed domicile rules will continue to apply. These individuals will only face IHT on overseas assets if they meet both of the following conditions:

• UK resident for 15 out of the last 20 years

• UK resident in at least one of the four tax years before death

Planning Opportunity

If you are set to become a long-term UK resident from 6 April 2025, you may benefit from gifting overseas assets before this date. Such gifts would not be subject to the seven-year survival rule.

Changes to Business Property Relief (BPR) and Agricultural Property Relief (APR)

Currently, BPR and APR offer relief at 100% or 50% under specific conditions:

• 100% BPR – Available for sole trader businesses, partnership shares, unquoted trading company shares, and AIM-listed shares.

• 50% BPR – Available for controlling interests in quoted companies and certain business assets like land, buildings, and machinery.

• 100% APR – Generally available unless the property is let under a qualifying lease.

• 50% APR – Applies if the property is tenanted under a pre-1 September 1995 lease with more than two years remaining.

From 6 April 2026, the availability of 100% relief for both BPR and APR will be capped at £1 million. Any value above this threshold will receive only 50% relief, resulting in an effective IHT rate of 20% (50% of the standard 40% IHT rate).

Additionally, from the same date, AIM-listed shares will qualify for only 50% relief.

Pension Changes

Currently, pension funds are outside the scope of IHT. However, from 6 April 2027, pension funds will become part of the deceased's estate for IHT purposes.

This change may result in double taxation in some cases:

• If the deceased dies before age 75, beneficiaries will inherit the pension tax-free.

• If the deceased dies after age 75, beneficiaries will pay income tax on the inherited pension at their personal rates.

This could result in a pension pot being taxed both via IHT and then again through income tax on the beneficiaries.

Seek Expert Advice

Given these significant changes, now may be the ideal time to seek professional advice to minimize your IHT exposure. Contact our team for a no-obligation initial consultation.

Authored by: London Tax Team