Inheritance tax was the last part of the British system still governed by domicile, and the part where domicile did the most work. A foreign domiciliary was charged on assets situated in the United Kingdom, property situated abroad was excluded property, and a structure that put the family’s wealth beyond the reach of a deemed domicile finding was the standard answer for anyone who intended to leave eventually.
That answer no longer holds. Section 44 of the Finance Act 2025 took the domicile test out of the excluded property rule for property held outright, and section 45 did the same for settled property, each coming into force on 6 April 2025 by its own final subsection rather than by a commencement order. Both put a residence test in the place of domicile. The new test is easier to apply and harder to escape, because it is counted rather than argued, and because it does not stop when the client’s flight does.
Ten of twenty
Section 6A of the Inheritance Tax Act 1984 states the test. An individual is a long-term United Kingdom resident at all times in a tax year if they were resident in the United Kingdom for at least ten of the previous twenty tax years. Subsection (2) sets out the two ways the status comes to an end, which are dealt with below, and section 6B modifies the count for anyone who was under twenty immediately before the tax year, substituting the number of whole tax years they had been alive for the twenty and half that number for the ten, and providing that nobody is a long-term resident in a tax year before which they were under the age of one.
Two features of the main rule deserve attention. The first is that residence is determined by the statutory residence test for 2013-14 onwards, itself a counting exercise built on days, ties and work patterns, so that for those years there is no room for the argument that a client was present but not really resident. For 2012-13 and earlier, section 6A(5) provides that the question is decided as it would have been decided for income tax purposes for that year, under the rules that preceded the statutory test. The second is that the status applies at all times in the tax year. It does not phase in during the year in which the tenth year is completed. An individual either is or is not a long-term resident for the whole of the year, and a death in the first week of that year is treated the same as a death in the last.
The threshold arrives sooner than most clients expect. The old marker was deemed domicile under section 267 as it stood on 30 October 2024, which required residence for at least fifteen of the twenty tax years immediately preceding the relevant year and for at least one of the four tax years ending with it. Ten of the previous twenty is a materially shorter fuse, and because the twenty year window rolls, an individual who leaves and returns can reach the threshold without ever having spent ten consecutive years in the country.
The tail
The provision that changes planning most is the one governing when the status ends, because it does not end on departure.
Section 6A(2)(b) keeps an individual within the charge until they have completed a run of consecutive non-resident tax years ending with the tax year before the one in question. Subsection (3) fixes the length of that run, and the count behind it is not taken from the current year. It is taken from the twenty tax years ending with the last tax year for which the individual was United Kingdom resident, so the required number is settled on departure and does not fall as the years away accumulate. Thirteen resident years or fewer in that window produce a run of three tax years. From fourteen the run lengthens by a year at a time, so fourteen gives four, fifteen gives five, and twenty gives ten. There is a second route out in section 6A(2)(a), which ends the status where the individual was non-resident for any ten consecutive tax years during the nineteen tax years before the year in question. HM Revenue and Customs reproduces the same table in its Inheritance Tax Manual.
The design is a proportionality rule rather than a penalty for leaving: the longer the connection, the longer it takes to sever. Its practical effect is that a family resident for eighteen of the twenty tax years ending with their last resident year, who then move to Madrid, remain within the charge on their worldwide estate for eight tax years afterwards, during which a death produces a British assessment on assets that may have no British connection at all.
That is eight years of exposure of everything the family owns, at 40 per cent above the nil rate band, and the family will be living somewhere else while it runs.
What the status actually reaches
For a long-term resident, the charge is on worldwide assets. For anyone else, section 6 makes property situated outside the United Kingdom excluded property, and does the same for a holding in an authorised unit trust and a share in an open-ended investment company even though those are situated in the United Kingdom. Schedule 1 sets the rate at nil on the first £325,000 and 40 per cent above it, a threshold that HM Revenue and Customs publishes as unchanged since 6 April 2009. Section 8D adds a residence nil-rate amount drawn from a residential enhancement of £175,000 for 2020-21 and later years, which can take an individual’s combined figure to £500,000, and higher where a brought-forward allowance from a deceased spouse or civil partner is available under section 8G, but only so far as a qualifying residential interest is closely inherited, and the allowance is reduced by £1 for every £2 by which the estate exceeds the £2,000,000 taper threshold. Section 8K defines closely inherited more widely than children and grandchildren, covering lineal descendants and, in defined cases, their spouses and civil partners, and treating step-children and adopted, fostered and guarded children as children. Schedule 1A reduces the rate to 36 per cent, but component by component rather than across the estate as a whole, and only where the charitable gifts within a component are at least 10 per cent of that component’s baseline amount as paragraph 5 of that Schedule defines it.
One further limit belongs here because it turns on the same status. Where the transferor is a long-term resident immediately before a transfer and their spouse or civil partner is not, section 18(2) caps the exemption for transfers between them at the nil rate band figure in Schedule 1, cumulatively across all such transfers, and HM Revenue and Customs applies that cumulation across successive spouses. Section 267ZC allows the spouse who is not a long-term resident to elect to be treated as one, on conditions about the marriage and the other spouse’s status within a seven year period, and once made the election cannot be revoked, though a lifetime election ceases to have effect after ten successive tax years of non-residence beginning after the date it was made.
The nil rate band, the residential enhancement and the taper threshold have been static for a long time and will remain so. Section 86 of the Finance Act 2021, as amended by section 72 of the Finance Act 2026, disapplies indexation of the rate bands, the residential enhancement and the taper threshold up to and including tax year 2030-31. In an inflationary period a frozen band is a rising effective rate, and an estate that was comfortably inside the threshold when the plan was written may not be by the time it operates.
One category of asset never depended on the individual’s status and still does not. Schedule A1 prevents property being excluded property to the extent its value is attributable, directly or indirectly, to relevant United Kingdom property held through a close company or a partnership. Relevant United Kingdom property meant a United Kingdom residential property interest until Schedule 12 to the Finance Act 2026 added United Kingdom agricultural property, with effect for times on or after 6 April 2026. An interest worth less than 5 per cent of all the interests in the company or partnership is disregarded, but a connected person’s interest is added to it before that test is applied, and consideration received on a disposal is denied excluded property status for the two years following. So a British dwelling, and since 6 April 2026 British agricultural land, carries its value into the charge through the offshore structure that holds it, whatever the residence position of the person behind the structure.
Trusts, and the settlor’s status
The largest body of affected structures is trusts, because the old regime made the settlor’s domicile at the date of the settlement decisive and permanent. A settlement made by a foreign domiciliary held excluded property indefinitely, whatever happened to the settlor afterwards. That was the excluded property trust, and it was the single most common vehicle in international estate planning for British connected families.
Section 48ZA, inserted by section 45, rebuilds this for settled property situated outside the United Kingdom and for holdings in an authorised unit trust and shares in an open-ended investment company. Where the settlor is alive, the property is excluded property at any time when the settlor is not a long-term resident, so the test moves with the settlor rather than being fixed at the outset. Where the settlor died on or after 6 April 2025, the test is their status immediately before death. Where the settlor died before 6 April 2025, the old rule survives untouched and the property is excluded property if the settlor was not domiciled in the United Kingdom when it became comprised in the settlement. HM Revenue and Customs sets the three cases out in that order. A separate rule in section 48ZA(5) disapplies the first two where a qualifying interest in possession subsists and the person entitled to it is a long-term resident.
Schedule 13 carries the change through the rest of the Act, reaching the spouse exemption in section 18, the ten year anniversary charge in section 64 and the exit charge in section 65, each of which now turns on the same three cases. The consequence for an existing structure is that, wherever the settlor is alive or died on or after 6 April 2025, its protection is no longer a historical fact. A trust settled by a client who was foreign domiciled in 2016 does not carry that status forward automatically. Where the settlor becomes or remains a long-term resident, foreign property in a settlement without a qualifying interest in possession is not excluded property and is therefore relevant property, with anniversary and exit charges attaching to assets whose trustees may never have filed a British return.
What the transitional protection actually covers
Paragraph 46 of Schedule 13 protects a narrow group, and the group is defined by dates rather than by circumstances. An individual who would otherwise be a long-term resident is treated as not being one where three conditions are met together: they were not domiciled in the United Kingdom on 30 October 2024, they have been resident in the United Kingdom for no tax year in the period beginning with 2025-26 and ending with the year in question, and they were resident either for none of the three tax years immediately preceding that year or for fewer than fifteen of the twenty immediately preceding it. In testing domicile on 30 October 2024, deemed domicile and domicile elections are ignored, so a client who was deemed domiciled under the fifteen year rule while foreign domiciled in fact is not shut out by the first condition.
Read carefully, this protects the client who had gone before 6 April 2025 and has not come back. The second condition is counted only from 2025-26, so a year of United Kingdom residence before that date does not break it, while residence in any tax year from 2025-26 onwards does, and HM Revenue and Customs states that the ordinary test then applies on a return. It does nothing for the client who was foreign domiciled but stayed resident. The 30 October 2024 date is a fixed point and cannot be reached retrospectively.
Settled property is treated separately, and the protection there is narrower than it is usually described. Where property became comprised in a settlement before 30 October 2024, was excluded property under section 48(3) or (3A) as those subsections then stood, and at the time of the charge is either situated outside the United Kingdom and outside paragraphs 2 and 3 of Schedule A1 or is a holding in an authorised unit trust or a share in an open-ended investment company, it stands outside the gift with reservation rules and outside certain charges in the qualifying interest in possession regime. It does not stand outside the relevant property regime. Ten year and exit charges reach it from 6 April 2025, subject to the cap that section 74 of the Finance Act 2026 introduced by inserting section 75B, treated as having come into force on that same date. The cap is £5 million for each ten year relevant period, and for the first period, running from 6 April 2025 to the next ten year anniversary, £125,000 for each whole successive quarter in it. HM Revenue and Customs describes the same position.
What the 2026 Act added
Part 2 of the Finance Act 2026 returned to the regime within a year of its commencement. Sections 66 to 70 bring certain pension interests within the charge by treating a scheme member as beneficially entitled immediately before death to notional pension property, and section 150A(5) situates that property in the country or territory in which the scheme is established, which is what connects it to the residence test. Section 71 applies those sections to deaths, and so far as relevant to other transfers of value, occurring on or after 6 April 2027. For a family whose British exposure was thought to be limited to a pension left behind, that is a material change with a known start date.
Section 73 disapplies the three exemptions in section 65(7), (7A) and (8) from the exit charge where a change in the settlor’s long-term residence status took place after the most recent ten year anniversary, produced no charge under that section at the time, and would have produced one had the property then been situated abroad; it is treated as having come into force on 26 November 2025. Section 75 inserts section 155ZA, which disregards, for the long-term residence count, any tax year in which the individual was at any time covered by one of five listed international exemptions for diplomats and similar persons, and is treated as having come into force on 6 April 2025 with effect for earlier tax years as well. The same Part also rewrote agricultural property relief and business property relief, which is a subject of its own.
The pattern across two Finance Acts is consistent. The residence test itself has not been reopened. What continues to move is the treatment of trusts, the treatment of assets that were previously outside the estate, and the length of time the bands stay frozen.
Counting years is not the same as counting time
The practical failure mode in this regime is arithmetical rather than conceptual. Clients think in calendar years and in the length of a posting. The statute thinks in tax years running from 6 April, and a tax year of residence is a tax year of residence whether the individual was there for the whole of it or for the minimum the statutory residence test requires.
A three year assignment that begins in February and ends in May touches five tax years. Someone who has spent nine tax years in the United Kingdom and leaves in the summer will complete a tenth unless they are non-resident for the whole of that tax year under the statutory residence test. Split year treatment is not the same thing, and it does not help the count: HM Revenue and Customs states that a year of split year treatment counts as a full year of United Kingdom residence for inheritance tax. Since long-term residence attaches for all of a tax year and the tail is measured in whole tax years thereafter, a mistake of a few weeks at either end can shift the exposure by a year in each direction.
The record the regime calls for is therefore a tax year by tax year residence table covering the last twenty years, built from travel records rather than from recollection. Very few families have one.
The old shape, and what replaced it
The old approach had a shape. Establish that the domicile of origin was retained, avoid the fifteen year deemed domicile threshold, settle an excluded property trust before it arrived, and leave. Each of those steps is now either irrelevant or insufficient.
What the statute makes determinative instead is a short list of dated facts. The number of tax years of United Kingdom residence in the previous twenty decides whether section 6A applies at all. The number of resident years in the twenty ending with the last resident year fixes the required number of consecutive non-resident years that follow a departure. The settlor’s status at the date of a charge, or immediately before death, or where the settlor died before 6 April 2025 their domicile when the property was settled, fixes the position of settled property under section 48ZA. Domicile on 30 October 2024 and residence from 2025-26 onwards decide whether paragraph 46 of Schedule 13 applies. And 6 April 2027 is the date from which pension interests enter the estate.
None of those is a matter of intention or of evidence of attachment. They are facts about a calendar, established from travel records and returns rather than argued after the event. That is the respect in which the regime that replaced domicile is a different kind of law from the one it replaced, and it is why the work it generates sits before a departure date rather than after it.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.