UK Inheritance Tax Reforms: What Changed in 2025?

In its 2024 Autumn Budget, the UK Government announced several inheritance tax (IHT) reforms with potentially significant implications for internationally mobile individuals, business owners, property owners, and pensioners. 

To help you stay current with the rules and plan your estate accordingly, this guide will explain the UK inheritance tax reforms that started enactment in 2025 and will continue coming into effect over the next couple of years. You will learn about: 

• The replacement of deemed domicile with the long-term resident status 
• The changes to the Agricultural Relief and Business Relief
• The freeze of the inheritance tax thresholds 
• The new treatment of pensions for the IHT purposes

Long-Term Residence Replaces Deemed Domicile

The most significant change that was announced in the 2024 Autumn Budget was the abolition of the deemed domicile system for UK inheritance tax purposes and its replacement with long-term residence. The new system was first applied in the 2025–2026 tax year, which started on April 6, 2025. 

Deemed domicile and long-term residence are rules used to determine how the tax applies to your property. All of your UK-situs assets, which are assets located in the UK, are always subject to the IHT. For properties located outside the UK, these rules determine whether inheritance tax applies. 

How Did Deemed Domicile Work Prior to the Reforms?

Under the domicile system, the type of assets that were subject to inheritance tax depended on your domicile:

• If you were domiciled in the UK, your worldwide assets would be subject to inheritance tax
• If you were not domiciled in the UK (non-dom), only your UK-situated assets would be subject to IHT

The deemed domicile rule determined how individuals who are not domiciled under common law were treated for tax purposes. For IHT, a person would be deemed domiciled if they were a UK resident for at least 15 years of the 20 years preceding the current tax year. 

Individuals who changed their domicile from the UK to another country fell under the three-year rule. It stated that, if an event relevant to inheritance tax—giving a gift or passing away—occurs within three years of a change of domicile, the person will be deemed domiciled and their non-UK property will be subject to the IHT.

How Does Long-Term Residence Work?

Under the new residence-based system, your estate’s liability to inheritance tax is determined by your residence status:

• If you are a long-term resident of the UK, your worldwide assets are subject to inheritance tax
• If you are not a long-term resident of the UK, only your UK-situated assets are subject to the tax

To be considered a long-term resident of the UK, you have to be a resident of the country for at least 10 of the 20 years preceding the year in which the chargeable event occurs. Residency is determined using the tax residency criteria.

Under transitional provisions, by becoming a non-resident in the first year of the new system, you will:

• Acquire a long-term resident status for three years if you were deemed domiciled before
• Will avoid long-term resident status entirely if you weren’t domiciled or deemed domiciled

Relinquishing Long-Term Residence: The Tail Rule 

The new long-term residence system also introduced a new tail rule for managing IHT exposure even after relinquishing residence in the UK. 

After you stop being a resident of the country, your non-UK properties will still be subject to IHT for up to 10 years, depending on how long you were a UK resident in the past 20 years: 

Years of UK Residence	Years of Additional Liability to IHT
Up to 13	3
14	4
15	5
16	6
17	7
18	8
19	9
20	10

After spending 10 consecutive years as a non-resident, the long-term residency test resets.

Agricultural Property Relief and Business Property Relief Get a Cap

Starting with the tax year of 2026–2027, the 100% inheritance tax relief will only apply to agricultural and business properties with a combined value up to GBP 2.5 million. Any value above that threshold will be liable for IHT with a 50% relief, or at an effective tax rate of 20%.

The changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) were first announced in the 2024 Autumn Budget and subsequently revised and introduced into legislation in 2025.

The APR and BPR are two tax allowances that let you pass agricultural property and business assets to your inheritors tax-free. The allowances offered 100% IHT relief on the whole value of:

1. Land or pasture used to grow crops or rear animals under APR 
2. Qualifying businesses and unlisted shares under BPR

Additional Changes to APR and BPR

Additional significant changes to agricultural and business relief that will come into effect on April 6, 2026, include the following: 

• Qualifying agricultural and business properties held in trusts will have their own, separate GBP 2.5 million allowance
• Shares on the Alternative Investment Market (AIM) and on unrecognized foreign exchanges will have their IHT relief reduced from 100% to 50%, for an effective tax rate of 20%
• The option to pay IHT in installments over 10 years will be extended to all properties eligible for APR and BPR
• Any unused portion of the personal GBP 2.5 million allowance can be transferred to the surviving spouse, much like the nil-rate band

Effectively, the new rule allows up to GBP 5 million of agricultural and business assets to be passed on without incurring taxes.

Nil-Rate Band Freeze Continues

The 2024 Autumn Budget prolonged the freeze on the nil-rate band and residential nil-rate band through the tax year 2029–2030. The 2025 Budget added another year, extending the current rate through 2030–2031. 

When liability for inheritance tax is assessed on your estate, two thresholds determine whether or not the tax will be applied, as outlined below:

Inheritance Tax Threshold	Value
Nil-rate band	GBP 325,000
Residential nil-rate band	GBP 175,000

An estate that’s valued below the nil rate band, or the combined value of the nil-rate band and the residential nil-rate band if the estate includes a main residence, isn’t liable for inheritance tax. Estates that are large enough to be liable for the tax only pay it for the portion above the nil-rate bands.

The current nil-rate band has been fixed since 2009. The residential nil-rate band has been fixed since 2020. 

Unused Pension Funds Included in Estates From 2027

Starting with the 2027–2028 tax year, most unused pension funds and death benefits will be included in estates for inheritance tax purposes. 

Under current legislation, the remaining funds in discretionary pension schemes—the majority of pension schemes in the UK—were exempt from the IHT. The new legislation will close the loophole while keeping certain benefits, such as death-in-service benefits, outside the scope of IHT. 

Who Will These Changes to the Inheritance Tax in the UK Affect?

The UK inheritance tax reform didn’t change the basic tax rate of 40% or lower the nil-rate band, so most estates shouldn’t be affected significantly. According to official estimates: 

• The APR and BPR cap is expected to increase the tax bill for 15%–20% of estates eligible for relief
• The fixing of the nil-rate band will not increase the estates exposed to IHT above 10%
• The inclusion of unused pension funds will put roughly 5% more estate into the scope of the IHT, and increase liability for roughly 18%

In practice, these reforms are likely to affect you if you: 

• Are a UK expat with overseas properties or a foreign expat with overseas properties living in the UK
• Have ownership in large businesses or agricultural properties
• Used an AIM portfolio as part of your estate planning
• Have money in a discretionary pension scheme
• Own property valued at around the IHT threshold

How To Adapt to the UK Inheritance Tax Changes

While the UK inheritance tax reforms cannot be avoided, you can consider taking some steps to reduce your estate’s exposure to the new rules. These steps include: 

1. Revising your UK resident status
2. Leveraging lifetime gifting to reduce estate size
3. Ensuring sufficient liquid assets to cover IHT
4. Seeking professional help for estate planning

Revise Your UK Resident Status

Under the long-term residence inheritance tax regime, non-UK assets can become exposed to the IHT more quickly and remain exposed for a longer time, even after leaving the UK. To determine your assets’ exposure, it is critical to understand the criteria for UK residency. 

These criteria have been further complicated by the application of two sets of rules, depending on the year in which you’re trying to determine your status:

1. From the tax year of 2013–2014 and onward, the Statutory Residence Test (STR) applies
2. For years leading up to the 2013–2014, the pre-STR rules applied 

Based on your findings, you can try to avoid becoming a long-term resident, for example, by reducing the amount of time you spend in the UK or cutting meaningful ties with the country. If you had plans for seeking a residency elsewhere, you might consider prioritizing them to reduce the IHT tail. 

Leverage Lifetime Gifting To Reduce Estate Size

Lifetime gifting of assets can be used to reduce the estate size and transfer wealth without increasing exposure to IHT. The rules for lifetime gifting state that the following gifts can be given free of tax:

• Gifts to your spouse or partner if they’re living in the UK permanently
• Gifts with a total value of up to GBP 3,000 in any tax year
• Wedding gifts of up to GBP 5,000 to your children, GBP 3,000 to your grandchildren or grand-grandchildren, GBP 1,000 to anyone else
• Small gifts of up to GBP 250 per person each tax year
• Regular payments from your income that don’t affect your standard of living

For other types of gifts, the seven-year rule applies. This means that any gift given more than seven years before your death is not included in your estate. Gifts given within the seven years are subject to the inheritance tax on a sliding scale.

Ensure Sufficient Liquid Assets To Cover IHT

Maintaining liquid assets is highly recommended, as it prevents your family from having to sell parts of the estate to cover IHT, which can affect your planned succession and trigger capital gains taxes. 

There are several methods to ensure sufficient liquid assets are available to cover IHT. One of the more popular options is taking out a life insurance policy and placing it in a trust with the insured’s heirs as beneficiaries. 

Seek Professional Help for Estate Planning

Even without the constantly changing rules, the inheritance tax can be complicated to comprehend on your own. Seeking professional assistance can ensure that your estate is: 

• Properly evaluated for IHT exposure
• Structured to leverage the available allowances for minimizing tax exposure
• Regularly reviewed for adaptation to further legislative changes

If your estate planning strategy includes securing a second residency in a more favorable tax jurisdiction, you might require help from professionals who specialize in tax optimization for globally mobile individuals.

This type of planning can be more complex, as it requires a thorough understanding of foreign tax laws and immigration rules. To get reliable help from experienced specialists, contact Nomad Capitalist.

Reduce Your IHT Exposure With Nomad Capitalist

Nomad Capitalist is an advisory firm that focuses on cross-border tax efficiency for high-net-worth individuals. We’ve helped over 1,500 clients legally reduce their tax exposure, acquire second residency or citizenship, and secure investment opportunities abroad.

To help you navigate the UK inheritance tax reforms, we will create an Action Plan specific to your situation and financial and lifestyle goals. The Plan will include all the steps needed to ensure your objectives are met. 

Here’s what partnering with Nomad Capitalist looks like:

1. We ask you to fill out a form to determine whether we are a good fit
2. We schedule a 45-minute onboarding call to assess your circumstances and goals
3. Our specialists create an Action Plan and present it to you for approval
4. We implement the Plan over 12 months, managing the administrative tasks
5. You continue receiving support from us even after the Plan is implemented

Some of the steps we might consider when creating your Action Plan include researching appropriate offshore jurisdictions for second residency, setting up appropriate investment vehicles to expedite residency acquisition, and mapping your pathway to acquiring citizenship abroad, if needed. Get your Action Plan today!