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More than 1.1 million UK expats live in Australia, but many are unaware that UK Inheritance Tax (IHT) may still apply to them.
With a 40% top rate, understanding the rules is crucial to safeguarding your wealth for future generations.
New rules 2025
From 6 April 2025, the UK switched to a residence-based test. Now, if you’re a Long-Term Resident (LTR), your worldwide assets are subject to IHT. If you’re not LTR, only your UK assets are.
When you leave the UK as an LTR (UK resident for at least 10 of the previous 20 years), you keep this status for a “tail” period (3-10 years) of continuous non-UK residence before becoming non-LTR.
Transitional rules apply if you left the UK before 6 April 2025. Under these, you won’t be LTR if you were not UK domiciled on 30 Oct 2024, are not UK resident in the 25/26 tax year, and don’t return to the UK. If you were domiciled on 30 Oct 2024, you lose LTR status after three consecutive years abroad.
Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB)
Those subject to IHT benefit from the Nil Rate Band (£325,000), and the Residence Nil Rate Band where a home passes to direct descendants (up to £175,000, tapered for estates>£2m). Both are frozen until 2030, and any unused band passes to a surviving spouse.
Spouse exemption
If both spouses have the same IHT status, whether LTR or not, transfers between them are fully exempt.
For transfers from an LTR spouse to a non-LTR spouse, the exemption is capped at the £325,000 NRB. To receive the full exemption, the non-LTR spouse can elect to be LTR, but this brings their worldwide assets into the IHT net until they have been non-UK resident for 10 years.
Lifetime gifts
IHT doesn’t only arise on death, lifetime transfers can also create liabilities:
- Potentially Exempt Transfers (PETs) – Gifts to individuals or bare trusts. PETs become exempt if the donor survives seven years. If not, the PET fails and will be assessed for IHT.
- Chargeable Lifetime Transfers (CLTs): Typically gifts to discretionary trusts. If a CLT exceeds the NRB, the excess is taxed at 20%. If death occurs within seven years, the transfer is assessed at 40% with a credit for IHT already paid.
On death, CLTs and failed PETs are assessed chronologically. Taper relief reduces tax if death occurs within three to seven years, though the full gift still uses the NRB.
Strategies to reduce IHT
There are many strategies you can use to reduce IHT. The right approach will depend on your circumstances, and before acting you should seek advice. Care is required when transferring assets, as other taxes (Capital Gains Tax, Stamp Duty etc.) can apply.
Let’s look at an example where gifting to adult children can work to reduce IHT on death.
| Scenario 1 – no gift Brenda has lived in the UK all her life and moves to Australia on 1 September 2025. She dies on 3 September 2033, leaving Australian assets of £2.25m to her daughter, including her home worth £750k. The £325k NRB is available, and because her estate is >£2m, the RNRB is tapered to £50k. As Brenda dies within her 10-year tail, she is an LTR and IHT applies to her worldwide assets: IHT = (£2,250,000 − £325,000 − £50,000) × 40% = £750,000. |
| Scenario 2 – Brenda makes a gift On 2 September 2025 Brenda gifts £500k cash to her daughter. As a result, her estate on death is worth £1.75m rather than £2.25m. Brenda dies eight years after the gift was made, so it’s outside the IHT net. Next, the estate is assessed, and now the full NRB and RNRB are available: IHT = (£1,750,000 − £325,000 − £175,000) × 40% = £500,000. So, making the gift reduces IHT by £250,000, and more active planning could have had a larger impact. |
When could gifting be ineffective?
A gift made while LTR will be chargeable if you die within seven years, even if you’re no longer LTR at death.
Now assume Brenda has a three-year tail and dies on 3 September 2030. By this point she is non-LTR, but because the 2 September 2025 gift was made just over five years before death, it’s chargeable with taper relief:
IHT = (£500,000 − £325,000) × 40% × 40% = £28,000.
If she hadn’t made the gift, no IHT would have applied as she is non-LTR (assuming no UK assets).
The bottom line: why planning matters
Often the simplest strategies have the biggest impact on IHT, but planning early, ideally when you first move to Australia, is key.
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The Money & Life website is operated by the Financial Advice Association Australia (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
