Recent reforms in UK inheritance tax laws (IHT) mean the rules are changing significantly — especially for British citizens who have lived in the UK and now live abroad (including in Italy).
In this article we explain the key developments and what they could mean for your estate planning.
1. From Domicile to Residence
One of the biggest reforms to UK inheritance tax in decades is the replacement of the old domicile-based system with a residence-based regime. Under the previous system, a British citizen who had given up their UK domicile could often keep non-UK assets outside of UK IHT. From 6 April 2025, UK IHT will apply to worldwide assets depending on whether the deceased was a “long-term UK resident” — defined as someone who has been UK tax-resident for 10 out of the last 20 tax years. This replacement of “domicile” with “residence” may catches many internationally mobile retirees and former UK residents who did not expect to remain within the UK IHT net.
There is also now a “tail” period after leaving the UK: if a person had been resident for a long period before leaving, the UK may continue to tax their worldwide estate on death for up to ten years.
2. Frozen (Nil-Rate Band) up to 2031
The UK’s standard inheritance tax allowance (known as the nil-rate band) of £325,000 and the residence nil-rate band of 175,000 have been frozen until at least 5 April 2031.
For British citizens living abroad who own UK property, this extends to assets that remain UK-situated even if the worldwide regime applies differently.
3. Trusts and IHT: New Caps and Rules
UK trusts are frequently used by internationally mobile families to sheltering assets from UK inheritance tax. Under the recent changes:
i. Certain trusts set up by former non-UK domiciled individuals will now face caps on inheritance tax charges on non-UK assets.
ii. Trust assets that were previously “excluded” from IHT may now be brought into scope depending on residence and when the trust was created.
4. Pensions to become part of the Estate (From 6 April 2027)
Historically, UK pensions did not count as part of the taxable estate for IHT when someone died. From 6 April 2027, unused pension funds will be included in the estate and subject to 40% IHT on death. This reform could dramatically affect British citizens who hold significant pension pots. There is a transition window until April 2027 when reviewing beneficiary nominations can make a big difference — for example, temporarily nominating heirs in a way that allows the pension to be paid out tax-free in the meantime.