For many UK expatriates, Australia’s sunny climate, beaches and ‘lucky country’ attitude offers a welcome change from Brexit and His Majesty’s Revenue and Customs, responsible for the collection of taxes.
As of April 2025 however, changes to UK inheritance tax will re-classify its application on an individual’s worldwide estate, and may have unintended consequences for the 1.2 million UK expats now calling Australia ‘home’.
Need to know
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When does the UK inheritance tax apply?
UK inheritance tax (IHT) of 40% on the value of an individual’s worldwide estate applies to:
- the value of an estate above the £325,000 threshold; and
- an individual who has been a UK resident for at least 10 out of the last 20 tax years.
What are the changes?
Historically, inheritance tax could apply to UK citizens who relocated to Australia, or Australian citizens who made the UK their permanent home (or own UK assets at their death), based on their ‘domicile’ status.
The incoming reforms replace the concept of ‘domicile’ when assessing IHT, which was primarily a question of fact, with a ‘residence’ based system.
What about if I left the UK a long time ago?
The length of time an individual remains subject to worldwide inheritance tax after leaving the UK (sometimes called the ‘IHT tail’) will depend on how long they have been a UK tax resident. An ‘IHT tail’ of between 3-10 years applies to individuals after their departure from the UK.
| Example
Mary lives in Sydney. Before relocating to Australia, she was a UK resident for 20 years. IHT will apply to Mary for the maximum 10-year period after she leaves the UK. If Mary dies within the 10-year ‘tail’ period with an estate worth £2,000,000, the IHT charged will be 40% of £1,675,000 (£2,000,000 minus the £325,000 tax-free threshold). |
Will the UK inheritance tax apply to trust assets?
IHT may apply on any assets that have settled on trust. Its application will depend, among other things, on the tax residence status of the settlor.
Care needs to be taken if transferring assets into Australian trusts for individuals still caught within the UK IHT net, as an immediate 20% tax charge over the £325,000 threshold may apply.
Who is exempt from UK inheritance tax?
Estates passing to a spouse or charity may be exempt from some or all IHT. Concessions may also apply during a transitional period for certain former UK residents, as well as for existing trusts created before 30 October 2024.
What next
Careful consideration of an individual’s circumstances, and putting in place appropriate estate planning, is important when managing IHT on a worldwide estate. Strategies may include the use of Wills and trust structures in the UK and Australia.
Please contact a member of our team if you or someone you know may be affected by UK inheritance tax.
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Disclaimer
The points provided in this article should be considered as general advice only. It does not substitute for comprehensive legal and tax advice, which should be sought to fully understand the implications of these changes. While the author is admitted to practice in New South Wales, Australia, and routinely deals with UK-related issues, they are not qualified to give UK legal advice. It’s recommended to work in collaboration with your Australian tax advisors and trusted UK lawyers to remain compliant with both UK and Australian tax and succession planning requirements.
