As of January 2025 changes in the UK’s inheritance tax (IHT) laws are set to impact probate processes, particularly concerning non-UK domiciled individuals. Here’s an overview of the key updates:
Transition from Domicile-Based to Residence-Based IHT
- Implementation Date: Effective from 6 April 2025, the UK will shift from a domicile-based to a residence-based system for inheritance tax.
- Definition of Long-Term Residents: Individuals who have been UK tax residents for at least 10 out of the previous 20 tax years will be classified as long-term residents. This classification subjects them to UK IHT on their worldwide assets, regardless of their domicile status.
- Exit Charges for Non-Doms: Non-domiciled individuals who have resided in the UK for over 10 of the previous 20 years and subsequently leave may face exit charges on trusts, with potential charges up to 6% every 10 years.
Implications for Probate
- Estate Valuation: The inclusion of worldwide assets for long-term residents will necessitate comprehensive estate valuations during probate, potentially increasing administrative complexity.
- Tax Planning: Individuals affected by these changes should reassess their estate planning strategies to mitigate potential IHT liabilities, considering the extended scope of taxable assets.
Recommendations
- Review Wills and Estate Plans: It’s advisable to update wills and estate plans to reflect the new IHT rules, ensuring alignment with the forthcoming legal framework.
- Seek Professional Advice: Consulting with legal and tax professionals can provide tailored strategies to navigate these changes effectively.
These reforms represent a significant shift in the UK’s approach to inheritance taxation, emphasizing the importance of residency over domicile status. Staying informed and proactive in estate planning will be crucial to adapt to the evolving legal landscape.