UK inheritance tax for expats: the rules that still catch you abroad

Leaving the UK does not switch off UK inheritance tax. Plenty of expats assume it does, and it's a costly assumption. Two things keep you in the net: anything you still own in the UK is taxable wherever you live, and if you spent enough of the last 20 years in the UK, your worldwide estate can be caught for years after you go. The tax is 40 per cent above your allowances, so it's worth understanding exactly when it applies and how a well-drafted will softens the blow.

Here are the rules that actually matter.

The allowances, in brief

Everyone gets a nil-rate band of £325,000, below which no inheritance tax is due. On top of that, a residence nil-rate band of up to £175,000 applies where you leave a home to direct descendants, children or grandchildren, taking the effective threshold to £500,000. Anything left to a spouse or civil partner, or to charity, is exempt. And unused allowances pass to a surviving spouse, so a married couple can shelter up to £1 million between them.

The residence nil-rate band comes with conditions and a sting in the tail. It only applies to a home passing to direct descendants, not to nephews, nieces or siblings. And it tapers away on larger estates: for every £2 your estate is worth above £2 million, you lose £1 of it, so it disappears entirely by around £2.35 million. Awkwardly, that £2 million test ignores the spouse exemption and business or agricultural reliefs, so an estate can lose the band even where little tax is actually due.

The rate above your allowances is 40 per cent, falling to 36 per cent if you leave at least 10 per cent of the net estate to charity.

When your worldwide estate is caught

This is the rule that changed for expats, and the one most get wrong. Since 6 April 2025, whether your non-UK assets fall within UK inheritance tax turns on long-term residence, not the old domicile test.

You're a long-term UK resident, and so taxable on your worldwide estate, if you were UK tax resident for at least 10 of the last 20 tax years. They don't have to be consecutive. And leaving doesn't end it immediately: a tail keeps your worldwide assets in scope after departure, scaled by how long you lived in the UK. Ten to 13 years gives a three-year tail; it rises by a year for each further year of residence, up to a maximum of 10 years for someone resident for 20. Only once the tail runs out do your non-UK assets fall outside the net, and the clock resets if you return after a long enough spell away.

So a recent leaver who spent 15 years in the UK keeps worldwide exposure for five years after moving abroad. Someone who left two decades ago is well clear of it.

What's always caught, wherever you live

Separate from all of that, anything physically in the UK stays within UK inheritance tax regardless of where you live or how long you've been gone. That means UK property above all, but also UK-situated shares and UK bank accounts. Holding a UK home through an offshore company doesn't escape it either; those structures were brought into the net years ago.

The practical upshot: a long-settled expat with an Australian estate outside UK inheritance tax can still owe 40 per cent on a UK buy-to-let above the nil-rate band. The flat never leaves the UK net.

Gifts: useful, but not instant

Giving assets away in your lifetime can reduce your estate, but it isn't a quick fix. Most gifts are "potentially exempt": survive seven years and they fall out of your estate entirely. Die within seven years and they count, though tax on gifts above the nil-rate band tapers down between years three and seven.

Some gifts are exempt from the start. You can give away £3,000 a year (the annual exemption), make small gifts of up to £250 per person, give wedding gifts within set limits, and make regular gifts out of surplus income that don't dent your standard of living. One trap to avoid: if you give something away but keep using it, a home you carry on living in, for example, it's a "gift with reservation of benefit" and stays in your estate. Keep records of what you give and when; your executor will need them.

The pension change coming in 2027

A major shift lands on 6 April 2027: most unused pension funds and pension death benefits will be brought into your estate for inheritance tax. Pensions have long sat outside it, so this matters for anyone treating a UK pension as a way to pass wealth on. Gifts to a spouse remain exempt, and business and agricultural reliefs won't apply to pension money. If you're a long-term UK resident, even overseas pension schemes can be caught; if you're not, only UK-based schemes are. It's worth reviewing your pension nominations and your will together ahead of the change.

Double tax, and the short treaty list

If both the UK and your country of residence tax the same asset on death, relief depends on whether a treaty exists. The UK has inheritance tax treaties with only a handful of countries, Ireland, South Africa, the USA, the Netherlands, Sweden and Switzerland, plus older agreements with France, Italy, India and Pakistan. Most popular expat destinations aren't on the list.

Where there's no treaty, unilateral relief usually gives a credit against UK inheritance tax for death tax paid abroad on an asset located there, capped at the UK tax attributable to that asset. It softens double taxation rather than removing it, which is another reason to get the UK and local sides looked at together.

How this shapes your will

Understanding your exposure is the point at which it touches your will, and a well-drafted one does real work. Leaving assets to a spouse defers tax to the second death and preserves both sets of allowances. Leaving a qualifying home to direct descendants secures the residence nil-rate band. A charitable gift of 10 per cent or more drops the rate on the rest to 36 per cent. And your UK will needs to be coordinated with any will you hold abroad, so the UK assets are cleanly covered and nothing is missed or double-counted.

A couple of worked examples

Someone who moved to Dubai in 2025 after 15 years in the UK, then died three years later with £1 million in Dubai investments and £50,000 in a UK account, is still within the five-year tail. Her whole estate is in scope: after the £325,000 nil-rate band, that's 40 per cent of £725,000, around £290,000.

A man who moved to Australia in 2000 and never looked back dies owning a £400,000 UK flat and £1.5 million of Australian assets. The Australian assets are outside UK inheritance tax, he's long past any tail, but the UK flat is UK-situated and caught. After the nil-rate band, that's 40 per cent of £75,000, or £30,000.

Where this leaves you

The headline is simple even if the rules aren't: moving abroad doesn't end UK inheritance tax. Your UK assets stay caught for good, and your worldwide estate can stay caught for years after you leave. Knowing where you stand, on residence, on what's UK-situated, on the allowances, is the sensible first step before you make or review a UK will, and the way to make sure your allowances actually get used.

A clear, valid UK will is the foundation for that. Expat Legacy prepares UK wills for British expats, in plain English, structured to make the most of your allowances and to sit alongside whatever you hold abroad.

Sources

• Inheritance Tax overview (gov.uk)
• Inheritance Tax: residence nil rate band (gov.uk)
• HMRC Inheritance Tax Manual IHTM47020, long-term UK residence test (gov.uk)
• Inheritance Tax if you are a long-term UK resident (gov.uk)
• Inheritance Tax: gifts (gov.uk)
• Inheritance Tax on unused pension funds and death benefits, policy paper (gov.uk)
• Inheritance Tax: Double Taxation Relief (gov.uk)

This article is general information, not legal or tax advice. The rules are detailed and shifting, and your position depends on your own residence history and assets, so it's worth getting advice tailored to you before you act.