Legal News | 3.04.25

From domicile to residence: a fundamental change in the UK tax rules

From domicile to residence: a fundamental change in the UK tax rules

The new UK tax year marks a significant shift in the UK tax system. Ever since 1799, the concept of ‘domicile’ has been central in determining someone’s tax exposure. However, from 6 April 2025, the tax rules change and domicile will be replaced by a system based solely on residence.

What are Domicile and Residence?

• Domicile (very broadly) refers to the country an individual considers their permanent home, which may be different from where they actually reside;
• Residence (for UK tax purposes) is determined by how many days an individual spends in the UK in a given tax year. The UK has a test to help determine whether someone is UK tax resident or not (known as the ‘Statutory Residence Test’).

The Current Rules

Under the current rules (i.e. those in place prior to April 2025), with certain exceptions, where an individual has a domicile outside the UK (i.e. they do not consider their permanent home to be in any part of the UK), they will only be subject to inheritance tax on their assets in the UK. Their assets outside the UK do not fall within the scope of inheritance tax.

The rules also extend to gifts into trust. Non-UK assets gifted into trust can remain outside the scope of UK inheritance tax so long as the individual who added assets to the trust (also known as the ‘settlor’) was domiciled outside the UK when they did so.

Those who live in the UK but are domiciled elsewhere may also choose to be taxed under a special regime known as the ‘remittance basis’. If they do, they only pay UK tax on their income and gains from assets outside the UK when those are brought to the UK.

Imminent Changes

From 6 April 2025, the rules drastically change:

• the test for whether someone’s assets outside the UK fall within the scope of inheritance tax will depend on whether they are a ‘long-term resident’. To be long-term resident, someone needs to have spent at least 10 out of the last 20 tax years resident in the UK. If they are a long-term resident, all their assets will be within the scope of IHT (regardless of domicile);
• the IHT treatment of trusts with assets outside the UK will depend on whether the person who created the trust is long-term resident or not; and
• the remittance basis will be abolished and replaced with a new regime available to certain individuals in their first four years of UK residence (known as the ‘FIG regime’).

Opportunities for expats

British expats are typically UK domiciled, but resident outside the UK, and may potentially stand to benefit from the upcoming changes.

Assuming an expat is not a long-term resident (i.e. they have been outside the UK for 10 of the last 20 UK tax years), only their UK assets will fall within the scope of inheritance tax. This may be an improvement on their position under the previous rules where perhaps all their assets remained subject to inheritance tax, either because they were UK domiciled or had returned to the UK. The new rules may offer expats estate planning opportunities if a return to the UK is under consideration. If they do return, then they may also be able to take advantage of the new (and potentially favourable) ‘FIG’ regime.

Succession and Matrimonial Law

Despite the move to a residence-based tax system, domicile remains important for other areas of UK law, such as succession and matrimonial law.

The changes are complex and, if you think you may be impacted, then please do get in touch with our Private Client Team to discuss your circumstances further.