The abolition of the non-dom tax regime – Inheritance Tax

The changes were confirmed, and further details were announced (accompanied by a technical note released on the same day), by the new Labour Chancellor, Rachel Reeves. While the legislation remains in draft form and subject to change, we discuss the headline changes here.

History of UK Residence

Perhaps the most notable change is to base the scope of Inheritance Tax (IHT) on an individual’s history of UK tax residence, rather than the historic basis of domicile.

From 6 April 2025 an individual who is a long-term resident, meaning that they have been UK resident (in accordance with the rules set out in the UK Statutory Residency Test) for at least 10 of the last 20 tax years, will be liable to UK IHT on their worldwide estate.

For individuals who are 20 years old or younger the test will be whether they have been UK resident for at least 50% of the tax years since their birth.

Furthermore, where an individual that has been a long-term resident of the UK leaves the UK, they will remain in the charge of UK IHT for up to 10 years. This is the so called ‘IHT tail’ referred to in the press.

For those who have been resident in the UK between 10 and 13 years they will remain in scope of UK IHT for three tax years. This will then increase by a year for every additional year of residence. For example, if a person had been resident for 17 out of the last 20 tax years, they would remain within scope for seven tax years.

Of interest to some will be that with the move to a residence system, UK individuals with a UK domicile are now able to remove themselves from the scope of UK IHT with 10 years of non-UK residence.

Changes to Agricultural Property Relief and Business Property Relief

The Government has announced significant changes to Agricultural Property Relief (APR) and Business Property Relief (BPR), which are hugely valuable IHT reliefs, effective from 6 April 2026. In short, under the IHT rules as they stand today, most ownership interests in businesses and farms are not subject to IHT when they are transferred on death (or any other chargeable transfer, such as lifetime transfers to trust), regardless of their value. However, under the proposed changes, these two reliefs will be subject to a combined cap of £1m, with any value exceeding £1m benefitting from 50% relief rather than 100% relief. Given that the headline rate of IHT is 40%, that means that the applicable rate in respect of transfers exceeding the cap will be 20%.

This is a hugely significant change for business and farm owners. Those impacted should carefully consider their position with a view to mitigating the potential impact on their heirs, as well as the business or farm in question. This was including revisiting wills and life cover arrangements, in addition to given serious thought to lifetime gifting. Some impacted individuals may also wish to consider more radical strategies, such as selling assets or emigrating from the UK.

Pension changes

From 6 April 2027, UK registered pension schemes will be within the scope of IHT (this is not currently the case). There has been a growing trend in recent years of individuals leaving pension savings untouched, on the basis that this was a tax efficient wealth succession tool.

Individuals should now consider their plans carefully. For example, it may now make sense for any tax-free cash to be drawn down and, if appropriate, gifted. In some circumstances, it may also make sense to draw an income from the remainder of the fund in the form of regular drawings of the purchase of an annuity.

Would you like to know more

If you would like to discuss the impact of these changes, please get in touch with your usual Blick Rothenberg contact, or one of the team using the form below.

You can find out more about the non-dom changes on our dedicated page.