Under common law, there are three main types of domiciles:

Domicile of origin: acquired at birth, usually from the father, domicile of dependence: applies to minors or dependants; it changes with the parent's domicile and domicile of choice: Gained by moving abroad with the intent to remain there permanently.

Historically, domicile wasn’t a tax concept. It was relevant to marriage, wills, and succession. But from the early 20th century, UK tax laws began using it to define who paid tax on what. By the 1950s–70s, it was fully embedded in Inheritance Tax (IHT) legislation, and only UK-domiciled individuals were taxed on their worldwide estates.

For decades, UK expats focused on one thing: proving non-UK domicile. If successful, their overseas assets were beyond HMRC’s reach — even if their children remained in the UK.

But that era is ending.

A quiet shift is underway. UK IHT is now moving from being based on domicile to long-term residency. This change is already reflected in policy, reinforced by HMRC’s approach, and supported by government efforts to raise more tax.

The Numbers Behind the Shift

In the 2024–25 tax year, IHT receipts hit a record £8.2 billion, up from £7.4 billion the year before. In April 2025 alone, HMRC collected £800 million, the second-highest monthly figure on record. Projections suggest annual receipts will exceed £14 billion by 2030.

This surge isn’t just due to rising asset prices. It reflects frozen allowances, stealthy policy shifts, and a broadening tax base. The nil-rate band (NRB) for IHT — £325,000 — has been frozen since April 2009 and will remain so until April 2030.

A key driver of future IHT growth is the shift from domicile to long-term residency, and, from April 2027, the inclusion of unused pension pots within the IHT net. That alone is expected to raise £640 million in the first year and £6.2 billion annually by 2047.

So, what has changed and when?

The UK government has introduced a fundamental change to the IHT system. As of 6 April 2025, UK Inheritance Tax is no longer determined by domicile, but by residency. Here’s what that means:

Deemed domicile scrapped: The old 15/20 rule (15 of the past 20 years of UK residency) no longer applies.

New residency test: If you’ve been a UK tax resident for 10 of the previous 20 tax years, you are now considered a long-term resident for IHT.

IHT tail after leaving: Even after you leave the UK, IHT on your worldwide assets continues for 3 to 10 years, depending on how long you were resident before.

Transitional rules: Those deemed domiciled as of 30 October 2024 remain so under transitional rules, but only for a limited time.

Pension death benefits: From April 2027, unused pension pots at death will be subject to IHT, removing a key historical exemption.

This shift signals the end of domicile-based planning. Residence is now the core test, and that creates new challenges — particularly for British expats with UK-based children or financial ties to Britain.

A New Exposure for Expats

Living abroad no longer guarantees tax immunity. For example, let’s say you live in Portugal, hold a UK pension (SIPP, QROPS, or QNUPS), and your children are UK residents. If you die after age 75, your pension pot could face multiple layers of tax:

  • Lump sums paid to children may be taxed at up to 45% as income.
  • Any future growth or income will also be UK taxable.
  • The proceeds then form part of your children’s estates, subjecting them to UK IHT again.
  • This means that, even if you escape tax, your heirs might not — a classic intergenerational tax trap.

Offshore Trusts: A Protective Strategy

One powerful solution is the use of an offshore discretionary trust. Instead of naming your children as direct pension beneficiaries, you name the trust. Upon death, the pension is paid into the trust — often without triggering UK income tax — and held outside your heirs’ estates.

Benefits include:

Tax efficiency: Distributions can be made gradually, minimising income tax. Assets within the trust remain outside the IHT net.

  • Asset protection: Trusts safeguard wealth from divorce, creditors, or poor decisions.
  • Control and flexibility: Trustees can tailor distributions to suit heirs’ circumstances, age, or tax brackets.
  • This isn’t about evasion, it’s about stewardship, control, and smart legacy planning.

Preparing for a New Landscape

This shift from domicile to residency isn’t just technical — it’s philosophical. It reflects HMRC’s evolving view of global wealth and who it belongs to. For UK expatriates, it means future planning must be intergenerational and rooted in residence-based exposure. Fidelity recently noted that 58% of Gen Y and Z investors expect to inherit assets, but only 39% of advisers have worked with their clients’ adult children. That’s a critical gap.

The message is clear: the future of wealth transfer is about where your heirs live and how you plan — not where you were born.

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