Were you born in the UK or own UK assets? Inheritance tax and succession planning tips

IHT can apply to UK citizens (even if they have moved to Australia) and Australian citizens who have made the UK their permanent home or own UK assets at their death.

The UK imposes IHT at 40% on the value of an individual’s worldwide estate above their available nil band rate (£325,000, but with the potential to transfer this to a married spouse, if unused, to have a combined £650,000 and possible additional £175,000 each for a main residence nil rate band in 2024, noting these amounts will remain in place until 2030).

Transfers between spouses are exempt, provided they have the same domicile status. However, transfers to a non-UK-domiciled spouse (for example, an Australian spouse) are only exempt up to £325,000 unless the non-domiciled spouse elects to be treated as UK domiciled.

The UK currently imposes IHT according to domicile status rather than residence status.

There is no single definition of ‘domicile’.

You are born with a domicile of origin. A domicile of origin is generally established according to where you were born and follows the domicile of your father at the time of your birth if your parents were married.

You can acquire a domicile of choice (which is state-based in Australia) if you were born with a UK domicile of origin and you consider Australia to be your permanent or indefinite home, although it depends on the facts.

In practice, an individual from the UK who is born with a UK domicile of origin can move to New South Wales permanently and indefinitely and acquire a domicile of choice in New South Wales.

If an individual still has a UK domicile of origin at their death, they will potentially be liable to IHT on their worldwide estate. However, if they have acquired an Australian domicile of choice or have an Australian domicile of origin, they will only be liable to IHT on their UK estate and anything transferred into a UK trust.

Recent reforms

From 6 April 2025, there will be a dramatic change to IHT, with the abolition of the century long ‘domicile’ based system in favour of a ‘residence’ based system. 

The new rules mean that the UK will impose IHT on the value of an individual’s worldwide estate if they are resident in the UK for at least 10 years of the last 20 tax years (which makes them a ‘long term resident’).  Depending on how long an individual has been a long term resident, a ‘tail’ of between 3 to 10 years will keep individuals within the IHT net after leaving the UK.  The length of the ‘tail’ will depend on how long the individual was resident in the UK in excess of 10 years.  For example, an individual who has been UK resident for 20 years or more before moving to Australia will be subject to the maximum 10 year period.  However, an individual who has only been UK resident for 15 years before leaving will remain subject to worldwide IHT for 5 years.

The IHT liability on assets in trust will depend on whether a settlor is a long term resident at the relevant time.  Even if a settlor settles non-UK assets into a trust when they are not a long term resident, the assets will fall within the scope of IHT if the settlor is a long term resident at the relevant time, even if the settlor cannot benefit from the trust. In short, IHT will be applicable to assets in trust if IHT is applicable to the settlor, so care must be taken for any such individuals establishing an Australian trust, for example, to avoid being subject to immediate 20% IHT over the value of the transfer to the trust exceeding their nil rate band of £325,000. There are however concessions for existing trusts created before 30 October 2024 and transitional rules will apply. 

The new rules provide certainty for individuals who have already left the UK or are planning to leave the UK, but mean that individuals may be kept within the IHT net for a longer period of time than under the domicile-based system.

Concessionary transitional provisions

Concessionary transitional provisions apply for individuals who have already left the UK (or leave the UK by 6 April 2026) and who are deemed domiciled but not actually domiciled in the UK as at 30 October 2024 (for example where they have acquired a domicile of choice in the applicable state or territory in Australia by acquiring an intention to reside there permanently and indefinitely). For these individuals, the test remains the current deemed domicile test (ie whether they have been UK resident for at least 15 of the last 20 years and at least one of the preceding four tax years) and a three-year IHT tail applies. 

In these circumstances, an individual’s domicile status would remain relevant until they have been resident in Australia for at least 10 tax years. 

Careful planning is required. Some common strategies for individuals with an IHT exposure include:

• obtaining advice on your residency status to determine how long you will be subject to IHT after leaving the UK;
• lifetime gifting of:
  • £3,000 worth of gifts per year plus £250 to any number of individuals;
  • regular gifts out of income (which varies according to circumstances);
  • potentially exempt transfers (ie absolute gifts), which are exempt if the individual survives for seven years (with tapered rates applying in between);
• encumbering property liable to IHT with debt, as IHT is due on the net value of an estate, but complex rules apply to this;
• making gifts to UK charities in a Will (which are IHT exempt); and
• if captured under the concessionary transitional provisions, then a statutory declaration of domicile can be prepared as evidence of current domicile status. This is not binding on HMRC but can be used as evidence in the event that on death HMRC dispute an individual has acquired a domicile of choice in a specific state in Australia and has instead retained a UK domicile of origin. The latter would mean that the worldwide estate, and not just that situated in the UK, may be liable to UK IHT.

This article primarily discusses IHT, but individuals should also seek professional advice on:

• whether to have Wills and the equivalent of enduring powers of attorney, which deal with financial decisions in case of mental incapacity, in both the UK and Australia. Although the UK and Australia will recognise Wills prepared in either country, it is important to have the equivalent of an enduring power of attorney in the UK (known as a lasting power of attorney) as Australian enduring powers of attorney (state-based in Australia) will not be recognised in the UK and vice versa.

The succession of real estate follows the laws of the country or state where it’s located, while succession to other assets (movable property) is determined by an individual’s domicile (state-based in Australia) at the date of death.

Due to lengthy administrative delays in probate proceedings, it’s typically advisable to have Wills in both countries, carefully drafted to prevent accidentally revoking each other. This allows for more flexibility in Australian estate planning, such as incorporating asset protective and tax-effective testamentary trusts into Australian Wills and makes the administration of an estate quicker and less complicated;

• Australian capital gains tax, as if you have a simple Will leaving everything to your children outright and your children are living abroad at the time of your death, Australian capital gains tax may be triggered and act as an effective back door inheritance tax. This does not apply in relation to gifts to Australian resident beneficiaries and can also potentially be avoided for non-resident beneficiaries by having Wills with testamentary trusts in them and provisions to deal with this issue;
• the Australian tax and compliance requirements of owning UK assets or having an interest in a UK trust or company. If these have not been disclosed to the ATO (for example, because they were inherited from a parent), the individual should consider doing so through the ATO voluntary disclosure regime to avoid harsh penalties; and
• if there is any possibility of a return to the UK or spending significant amounts of time in the UK, then tax advice should be obtained in Australia and the UK well before any change in circumstances to avoid unforeseen tax liabilities being incurred and allow the restructure of wealth if appropriate.