Exposure To Inheritance Tax on Overseas Property Holdings

For many UK residents, owning property abroad is part of a lifestyle or investment strategy, a villa in Spain, an apartment in Dubai, or a holiday home in Portugal. But while these assets may sit outside the UK’s borders, they are not necessarily outside HMRC’s reach.

Under current law, UK Inheritance Tax (IHT) can apply not only to your UK assets but also to your worldwide estate, depending largely on your Long-term residence rules. With a 40% tax rate above the nil-rate band (NRB), i.e. £325,000, and potential residence nil rate band (RNRB) up to £175,000 per person, the exposure can be significant.

From 6 April 2025, the UK government has abolished the concept of domicile as a connecting factor for tax purposes and replaced it with a residence-based system. This will fundamentally reshape how overseas property is treated for IHT, especially for long-term UK residents.

The Previous Inheritance Tax  Landscape (Before April 2025)

Before 6 April 2025, IHT liability depended on where you were domiciled:

• UK-domiciled individuals were taxed on their worldwide assets, including property located abroad
• Non-UK-domiciled individuals (non-doms) were only taxed on UK-sited assets

If you have lived in the UK for 15 of the past 20 tax years, you are deemed domiciled. Once deemed domiciled, your overseas property, no matter where it is, comes within the scope of UK Inheritance Tax.

In practice, this means a long-term UK resident owning a £2 million villa in Spain and a £1.5 million home in London could face IHT on both. Domicile, not physical location, determines liability.

Why the System Changed?

The UK government has long recognised that the domicile concept is complex, outdated, and often unfair. It allows long-term residents to retain non-dom status and exclude foreign wealth from UK tax, while others in similar circumstances pay tax on all their global income and assets.

To simplify the rules and ensure fairness, the Spring Budget 2024 announced that from 6 April 2025, domicile no longer determines tax treatment. Instead, a new, residence-based system applies across Income Tax, Capital Gains Tax and Inheritance Tax.

According to HMRC’s technical note Reforming the taxation of non-UK domiciled individuals, March 2024, this reform aimed to “remove the outdated concept of domicile status” and ensure everyone who is long-term resident in the UK pays tax here.

The New Residence-Based IHT Regime (From April 2025)

Since 6 April 2025, an individual’s exposure to UK Inheritance Tax depends on how long they have lived in the UK, not on their domicile of origin.

Under the new system:

• You will be within the scope of UK IHT on your worldwide assets if you have been UK-resident for at least 10 of the previous 20 tax years immediately before the chargeable event (such as death or certain gifts)
• Those resident for fewer than 10 years will only be liable for IHT on UK-sited property

This creates a new category of individuals known as “long-term residents.”

When a person leaves the UK, their worldwide estate does not fall out of scope immediately. Depending on how long they lived in the UK, they will continue to be within IHT scope for a “tail period” of between 3 and 10 years.

After 10 consecutive years of non-residence, an individual will drop out of the UK IHT net entirely.

How the New Rules Affect Overseas Property?

The new system fundamentally alters how foreign homes and investments are treated.

If you are a long-term UK resident, your overseas property, whether owned personally or through a company or trust, will now form part of your UK taxable estate. This means a property in Spain, France, or Dubai could attract UK Inheritance Tax even if you never remitted any income from it to the UK.

For those moving to the UK, it is crucial to understand how quickly exposure can arise. A new arrival who becomes a UK resident and remains here for more than 10 years could suddenly find their overseas holdings fully taxable on death.

Historically, individuals could use non-UK trusts to keep overseas assets outside the UK IHT net through the “excluded property” rule. Excluded property meant property owned in a foreign land by non-domiciled individuals. They were completely protected from IHT in the UK, whether kept in trusts or owned individually. However, since April 2025, that protection largely disappeared.

Under the reforms, trust assets come in and out of IHT scope depending on whether the settlor (the person who created the trust) is a long-term UK resident at the time of the chargeable event. This makes timing and residence monitoring even more critical for international families.

Valuation & Double Taxation Relief

Even under the new regime, IHT will be calculated based on the open market value of overseas property at the date of death.

Where a property is located in a jurisdiction that also levies inheritance or estate tax, such as France, Spain, or the United States, there is potential for double taxation.

Fortunately, the UK has Inheritance Tax double taxation treaties, including with the US, France, Italy, the Netherlands, South Africa, and Ireland. These treaties allow tax paid overseas to be credited against your UK IHT bill, ensuring you are not taxed twice on the same asset.

Transitional & Grandfathering Provisions

The government has confirmed transitional arrangements to smooth the shift between systems:

• Existing deemed-domiciled individuals who are non-resident in 2025/26 will continue under the old “15-out-of-20” deemed-domicile rule until they return to the UK.
• Excluded property trusts established before 30 October 2024 will retain their protection until 5 April 2025. After that, trust assets may become chargeable if the settlor is a long-term resident.
• Individuals who die before 6 April 2025 will be assessed under the old domicile-based rules.

In short, the new regime applies only to chargeable events on or after 6 April 2025.

Planning Opportunities Under the New Regime

The shift to a residence-based IHT system requires fresh planning strategies. Some practical steps include:

Understand how many UK tax years you have accumulated. If you are approaching the 10-year threshold, consider whether continued residence aligns with your long-term estate planning objectives.

Those who are new to the UK can still plan efficiently before their 10-year period elapses. Setting up non-UK trusts or transferring ownership structures before April 2025 may preserve excluded property status for a limited period.

Lifetime gifting, which is especially of overseas assets, can reduce the size of your taxable estate. In addition, life insurance written in trust can provide funds to cover potential IHT liabilities.

Because the new system interacts with local inheritance regimes, UK residents with property abroad should obtain specialist local tax advice to ensure compliance and claim available treaty relief.

The Broader Impact of the 2025 Reforms

This move to a residence-based IHT system marks one of the most significant shifts in UK tax policy in decades. It reflects the government’s desire to modernise the system, simplify compliance, and align the UK with other major jurisdictions that use residence rather than domicile as the tax determinant.

However, it also means that long-term UK residents, including expatriates, foreign nationals, and returning Britons, will face broader IHT exposure than before. International families who once relied on domicile distinctions or offshore trusts will need to reassess their structures urgently.

Key Takeaway

From 6 April 2025, UK Inheritance Tax no longer depends on domicile but on residence history. Anyone who has lived in the UK for 10 years or more may find their worldwide estate, including overseas property, within HMRC’s reach.

Proactive estate planning, particularly before becoming a “long-term resident”, is essential. Those with overseas holdings should take advice now to understand how these reforms will impact them and what options remain for protection or mitigation.

Conclusion

The UK’s shift to a residence-based Inheritance Tax regime has now transformed how overseas property is treated. Since 6 April 2025, the old domicile-based rules have been replaced, bringing a far greater number of long-term UK residents into the IHT net.

Under the new system, anyone who has been UK-resident for 10 of the previous 20 tax years is now subject to IHT on their worldwide estate, including overseas property. As a result, homes and investments abroad, once believed to be safely outside HMRC’s reach, are now fully within scope.

For UK residents with property overseas, this change highlights the need for proactive estate planning. Reviewing ownership structures, assessing residence history, and understanding local inheritance laws are now essential steps in preventing unexpected tax exposure. Double tax treaties can offer some protection, but they rarely eliminate the liability.

In the months since the reform took effect, many internationally mobile individuals have already begun restructuring their affairs using trusts, lifetime gifts, or insurance to manage potential liabilities. Those who have not yet acted should seek specialist cross-border advice without delay.

The message is clear: owning property overseas no longer provides a shield against UK Inheritance Tax. With the new residence-based rules firmly in place, taking early, informed action is key to protecting your global estate and preserving family wealth for the next generation.