Long-Term Non-Residency & UK Inheritance Tax : The 10/20 Rule, IHT Tail & Expat Planning

What Changed on 6 April 2025: From Domicile to Residence

For 150 years, UK inheritance tax was determined by domicile. Domicile is a legal concept distinct from residency: you could be a resident in the UK (spending 91+ days per year) but domiciled elsewhere (through property ownership, family ties, or formal domicile declarations overseas).

Under the old system: - If you were domiciled in the UK, your worldwide estate was subject to IHT at 40% (above the nil rate band) - If you were domiciled overseas, only your UK-situs assets were subject to IHT; your foreign assets were protected

For a British expat in Portugal who was domiciled overseas, the old system offered strong protection. An estate worth GBP 5 million (GBP 2 million in Portugal, GBP 3 million in the UK) would be exposed to IHT only on the GBP 3 million UK portion.

From 6 April 2025, this changed entirely. Domicile no longer determines IHT liability. Instead, residence does.

Under the new residence-based system: - A "long-term resident" (UK resident for 10 of the previous 20 tax years) is subject to IHT on their worldwide assets, regardless of domicile - A "non-long-term resident" (out of the UK for more than 10 of the previous 20 tax years) is subject to IHT on UK-situs assets only

For expats who were previously protected under the domicile system, this is a material change. An expat domiciled overseas but who spent 11 of the last 20 years in the UK is now classified as a long-term resident and their worldwide estate is exposed to IHT.

The Long-Term Resident Definition: 10 of 20 Years

The core test is simple in concept but technical in application: are you a "long-term resident"?

You are a long-term resident if you were UK tax resident in 10 or more of the 20 tax years immediately preceding your death (or preceding the time you became non-resident, if earlier).

Example 1: 20-Year Expat - Left UK in 2005: years 2005/06 through 2024/25 = 20 years of non-residence - 10 of the last 20 years (measured backwards from death): years 2005/06 through 2024/25 = 0 UK resident years - Classification: NOT a long-term resident - IHT exposure: Limited to UK-situs assets only

Example 2: 15-Year Expat Who Returned Briefly - Resident 1980/81 through 2009/10 (30 years in UK) - Left UK in June 2010 - Returned to UK for 6 months in 2019 (183+ days in 2019/20) - Non-resident: 2010/11 through 2018/19 (9 years), and 2020/21 onwards - Long-term resident calculation at death in 2025: last 20 years are 2005/06 through 2024/25. UK resident years in this period: 2009/10 (final year before departure), 2019/20 (return year) = 2 years - Classification: NOT a long-term resident (only 2 of 20) - IHT exposure: Limited to UK-situs assets

Example 3: Early Departure But Not Enough Years Out - Resident 1990/91 through 2014/15 (25 years in UK) - Left UK in 2015 - Continuous non-residence 2015/16 through 2024/25 (10 years) - Death in 2025 - Long-term resident calculation: last 20 years are 2005/06 through 2024/25. UK resident years: 2005/06 through 2014/15 (10 years) - Classification: YES, a long-term resident (exactly 10 of 20) - IHT exposure: Worldwide assets

Notice that in Example 3, even though the individual has been out of the UK for 10 full years, they are still classified as a long-term resident because the 20-year lookback window includes the years they were in the UK before departure.

The calculation is strict: you must count backwards 20 years from death (or from the point you became non-resident), and determine how many of those 20 years you were UK resident.

IHT Exposure: Long-Term Residents vs Non-Long-Term Residents

Long-Term Residents

If you are a long-term resident, you are subject to UK IHT on your worldwide assets at the standard rate:

• IHT rate: 40% above the nil rate band
• Nil rate band: GBP 325,000 (per person)
• Residence nil rate band: up to GBP 175,000 (for UK residential property passed to direct descendants), available only if you owned a UK residence and pass the residence nil rate band property to qualifying heirs
• Married couple combined: up to GBP 650,000 from nil rate bands, plus up to GBP 350,000 from residence nil rate bands (if qualified), total potential sheltering GBP 1,000,000 for married couples

Example: Long-term resident with GBP 2.5 million estate - Worldwide assets: GBP 2.5 million - Nil rate band: GBP 325,000 - Taxable estate: GBP 2.175 million - IHT at 40%: GBP 870,000

Non-Long-Term Residents

If you are a non-long-term resident, you are subject to UK IHT only on UK-situs assets:

• UK-situs assets subject to IHT: UK real property, UK money in UK bank accounts, UK shares in UK companies, UK personal property (moveable goods)
• Foreign assets NOT subject to UK IHT: Portuguese property, foreign bank accounts, foreign shares, foreign investments
• The nil rate band and residence nil rate band apply to UK assets only

Example: Non-long-term resident with GBP 2.5 million estate - Portuguese property: GBP 1.5 million (NOT exposed to UK IHT) - UK property: GBP 700,000 - Foreign investments: GBP 300,000 (NOT exposed to UK IHT) - UK-situs assets subject to IHT: GBP 700,000 - Nil rate band: GBP 325,000 - Taxable estate: GBP 375,000 - IHT at 40%: GBP 150,000

For the non-long-term resident, the same estate (GBP 2.5 million) is subject to only GBP 150,000 in IHT (6% effective rate) versus GBP 870,000 for the long-term resident (35% effective rate). The difference is GBP 720,000.

The IHT Tail: The Hidden Exposure After Departure

The residence-based system introduced a complication not present under the old domicile system: the "IHT tail."

The tail works as follows:

If you were a long-term resident when you left the UK, and you subsequently acquire non-UK assets, those assets may remain exposed to UK IHT for up to 10 years after your departure, even if you are no longer a long-term resident (because you have now been out of the UK for 10+ years).

The tail applies to non-UK assets that:

1. Were acquired while you were a long-term resident in the UK
2. Have a significant connection to the UK (such as UK-based investments, trust assets where the trustee is UK-based, or property that you previously owned in the UK)
3. Are held at the time of departure or acquired shortly after

Example: The Tail in Action

• Expat left UK in 2015 after 20 years of UK residence (classified as long-term resident at departure)
• In 2016 (one year after departure), the expat acquired a property in Portugal for GBP 500,000
• In 2025 (10 years after departure), the expat dies
• Current classification: NOT a long-term resident (left 10 years ago)
• But the IHT tail: the Portuguese property acquired while the expat was still a long-term resident (within a year of departure) may remain exposed to UK IHT for 3-10 years after departure
• At death in 2025 (10 years after departure), the tail exposure has likely expired, and the property is not subject to IHT
• But if the expat died in 2020 (5 years after departure), the tail would still be in effect, and the Portuguese property could be exposed to UK IHT despite the expat being classified as non-long-term resident

The tail period is not fixed at 10 years; it depends on the nature of the asset:

• Typically 3-5 years for investment assets acquired shortly after departure
• Up to 10 years for real property or assets with strong UK connections
• Potentially indefinite if the asset is held in a UK trust with UK trustees

The tail is one of the most poorly understood aspects of the new IHT system, and many expats are unaware that they have tail exposure until their estate is calculated.

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Interaction Between UK IHT and Portuguese Inheritance Law

For British expats in Portugal, the interaction between UK IHT and Portuguese inheritance tax is critical.

Portuguese Inheritance Tax (Imposto sobre Sucessoes e Doacoes):

• Portuguese tax applies to Portuguese-source assets (real property located in Portugal, business assets in Portugal, Portuguese bank accounts)
• Portuguese tax rates: 0% for direct heirs (spouse, children, parents); 10% stamp duty for non-direct heirs
• Relief for UK IHT paid: Portugal provides relief for foreign taxes paid on the same estate, so if UK IHT is paid on a Portuguese asset, the Portuguese tax is reduced accordingly

The EU Succession Regulation (Brussels IV) determines which country's inheritance law applies to the succession:

• If the deceased was domiciled in Portugal at death, Portuguese succession law applies to all assets (unless the deceased elected UK law)
• If the deceased was domiciled in the UK at death, UK succession law applies to all assets
• If the deceased was domiciled elsewhere, the law of that country applies

For British expats in Portugal, the key question is: where was the deceased domiciled at death?

If the expat was domiciled in Portugal (through long-term residence, property ownership, and intention to remain), Portuguese succession law applies to all assets (including UK property). The estate is subject to Portuguese inheritance tax (0% for direct heirs on Portuguese assets, subject to UK IHT on UK assets).

If the expat was still domiciled in the UK (retained UK property as principal residence, maintained UK family ties, held UK-domicile intent), UK succession law applies to all assets. The estate is subject to UK IHT on worldwide assets (if still a long-term resident).

Most British expats in Portugal have changed domicile to Portugal (evidenced by long residence, property ownership, and centre-of-life connections). For these expats, Portuguese succession law applies, and Portuguese inheritance tax (0% for direct heirs) is the primary tax. UK IHT applies only to UK-situs assets, and the long-term resident rule provides the scope of exposure.

Will Planning for Expats: UK Assets vs Portuguese Assets

Proper will planning for expats addresses the two separate legal regimes that may apply:

UK Will (For UK Assets)

The UK will should:

• Identify all UK-situs assets (UK real property, UK bank accounts, UK shares)
• Specify the law governing the UK assets (English law, Scottish law, or Northern Irish law)
• Distribute UK assets to beneficiaries in a way that minimises IHT (using the nil rate band and residence nil rate band efficiently)
• Create trusts for minor children or beneficiaries who may need asset management
• Address UK IHT liability (which beneficiary pays the IHT, or is it deducted from the estate)

Example UK Will Clause:

"I direct that my UK property located at [address] shall be held for my spouse for life, with remainder to my children in equal shares. The residence nil rate band relief shall apply to this property, sheltering GBP 175,000 of value from IHT. The balance of my UK estate shall be divided equally among my spouse and children, with the spouse receiving the first GBP 325,000 (nil rate band) free of IHT."

Portuguese Will (For Portuguese Assets)

The Portuguese will should:

• Identify all Portuguese-situs assets (Portuguese real property, Portuguese bank accounts, business interests in Portugal)
• Comply with Portuguese succession law requirements (forced heirship rules, legitima-mandatory portions for direct heirs)
• Specify the law governing Portuguese assets (Portuguese law, with an optional election for UK law if a UK will also exists)
• Distribute Portuguese assets in a way that is tax-efficient under Portuguese inheritance law

Portuguese law has mandatory succession rules that differ significantly from UK law. In particular:

• Forced heirship: direct heirs (spouse, children, parents) have a guaranteed share of the estate (the "legitima")
• The portion available for free disposition (the "quotient dispositif") is limited
• Assets can pass automatically to heirs under Portuguese law without a will, but a will provides clarity and prevents disputes

Example Portuguese Will Clause:

"I hold Portuguese property located at [address] in common ownership with my spouse. Upon my death, my share passes to my spouse. I direct that my Portuguese bank account be divided among my children in equal shares, subject to Portuguese inheritance law provisions for the legitima of direct heirs."

Coordinated Planning: Separate Wills or One Will with Elections

Most expats are best served by having two separate wills:

1. A UK will (made under English law) for UK-situs assets
2. A Portuguese will (made under Portuguese law) for Portuguese-situs assets

Alternatively, a single will can be made under the EU Succession Regulation that applies to assets in both countries, with an election for the governing law. But this creates complexity and may not be as tax-efficient as two separate wills.

The key is coordination: the two wills must be consistent on major points (e.g., who the primary beneficiaries are, how the estate should be divided) while respecting the legal requirements of each jurisdiction.

Trust Planning for Expats: Minimising IHT Through Asset Location

For expats with significant estates, trusts can be an effective tool for IHT minimisation, but trust planning post-2025 is more complex than it was under the domicile system.

The Problem With Trusts for Non-UK Resident Settlors

If you create a trust as a non-UK resident and fund it with non-UK assets, the trust itself may still be subject to UK IHT if:

• The trustee is UK-based
• The trust is administered from the UK
• Trust assets include UK property or UK investments
• You retain significant control over the trust (deemed settlor interest)

This creates complexity: an expat can create a Portuguese-administered trust with a Portuguese trustee holding Portuguese property, and that trust may still be exposed to UK IHT if the settlor is classified as a long-term resident (or within the tail period).

The Solution: Jurisdiction-Matched Trusts

For expats, the most effective trust structure matches the trust jurisdiction to the asset location:

UK Trust (For UK Assets)

• Established under English law
• UK-based trustee (bank or trust company)
• Holds UK real property, UK investments, UK bank accounts
• Subject to UK IHT on the trust corpus (at "relevant property trusts" rates of 20% initial charge, 6% every 10 years)
• But provides certainty for UK-situs assets and ensures they are administered according to UK law

Portuguese Trust or Will (For Portuguese Assets)

• Established under Portuguese law (if using a trust) or distributed through a Portuguese will
• Portuguese-based trustee or distribution under Portuguese succession law
• Holds Portuguese real property, Portuguese investments, Portuguese bank accounts
• Subject to Portuguese inheritance tax (0% for direct heirs)
• Not subject to UK IHT (on the basis that it is a Portuguese-domiciled trust with Portuguese assets and Portuguese trustees)

The distinction is important: by separating assets by jurisdiction and matching the trust jurisdiction to the asset location, the expat can ensure that:

• UK assets are efficiently structured under UK law and exposed to UK IHT only
• Portuguese assets are efficiently structured under Portuguese law and exposed to Portuguese inheritance tax only
• Cross-border complexity and dual exposure is minimised

Trust Planning for Life Insurance

Another common strategy is to establish a trust to hold a life insurance policy. The policy is owned by the trust (not by the individual), and the policy proceeds pass to beneficiaries through the trust without being included in the individual's taxable estate.

For a long-term resident with GBP 2 million in assets exposed to IHT, a GBP 800,000 life insurance policy owned by a trust can generate proceeds to pay the IHT liability (GBP 320,000) without burdening the beneficiaries.

For expats, this is particularly valuable during the IHT tail period, when exposure is temporary. A life insurance policy held in trust provides immediate liquidity to pay IHT, then lapses when the tail exposure ends.

Asset Location Planning: Where to Hold Different Assets

For expats managing IHT exposure, the location of assets (UK, Portugal, or offshore) has material tax consequences.

UK Property

• Subject to UK IHT if you are a long-term resident (or within tail period)
• Nil rate band and residence nil rate band relief available
• For expats with significant UK IHT exposure, holding UK property in the name of a Portuguese spouse (if married) can reduce exposure if the spouse is not a long-term resident
• Alternatively, holding UK property in trust with Portuguese beneficiaries can ensure the property is subject to Portuguese succession law (if the trust is Portuguese-domiciled)

Portuguese Property

• Subject to Portuguese inheritance tax (0% for direct heirs) if you are domiciled in Portugal
• NOT subject to UK IHT if you are a non-long-term resident (outside the tail period)
• For expats seeking to minimise IHT, accumulating wealth in Portuguese property is an effective strategy
• For expats who are long-term residents or within the tail period, Portuguese property acquired while a long-term resident may be exposed to UK IHT

Offshore Investments and Bank Accounts

• Generally NOT subject to UK IHT if held outside the UK (unless the account is held with a UK-domiciled institution with UK trustees)
• Subject to Portuguese inheritance tax if the account or investment is domiciled in Portugal or held by a Portuguese-domiciled person
• Often the most tax-efficient location for accumulating wealth is offshore (in a jurisdiction with low inheritance tax or no inheritance tax), with distribution to UK or Portuguese beneficiaries in the will

Practical Asset Location Strategy

For a long-term resident with GBP 2 million in wealth:

• Hold GBP 650,000 in UK property (within nil rate bands for married couple)
• Hold GBP 1.35 million in Portuguese property or offshore investments (outside UK IHT exposure)
• Create a will that distributes UK property to spouse and children (within nil rate bands)
• Create a will that distributes Portuguese property to Portuguese-domiciled beneficiaries (subject to Portuguese inheritance tax only)

For a non-long-term resident with the same wealth:

• Hold GBP 300,000-500,000 in UK property (if desired, subject to limited UK IHT exposure)
• Hold GBP 1.5-1.7 million in Portuguese property or offshore investments (fully protected from UK IHT)
• Create wills that allocate the assets efficiently under each jurisdiction's law

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Calculating the IHT Exposure of Your Estate

To determine your IHT exposure, follow this sequence:

Step 1: Determine Your Long-Term Resident Status

• Count the number of tax years you were UK resident in the 20 years immediately before death
• If 10 or more: you are a long-term resident
• If fewer than 10: you are a non-long-term resident
• Check whether you are within the tail period (3-10 years after departure from the UK)

Step 2: Identify Your UK-Situs Assets

• UK real property
• UK money in UK bank accounts
• UK shares and investments
• UK insurance policies
• UK personal property

Step 3: Calculate Your IHT Exposure

If you are a long-term resident: - Total worldwide assets - Less nil rate band: GBP 325,000 - Less residence nil rate band (if applicable): up to GBP 175,000 for UK residential property to direct descendants - Taxable estate - IHT at 40%

If you are a non-long-term resident: - UK-situs assets only - Less nil rate band: GBP 325,000 - Less residence nil rate band (if applicable): up to GBP 175,000 for UK residential property to direct descendants - Taxable estate - IHT at 40%

If you are within the tail period: - Calculate IHT on both UK-situs assets and tail-exposed non-UK assets - Determine the remaining tail period and plan to eliminate tail exposure before it expires

Example Calculation: Non-Long-Term Resident

• Portuguese property: GBP 1.5 million
• UK property: GBP 600,000
• Offshore investments: GBP 400,000
• Total estate: GBP 2.5 million

Long-term resident status: Non-long-term resident (out of UK 12 years)

UK-situs assets: GBP 600,000 Nil rate band: GBP 325,000 Taxable estate: GBP 275,000 IHT at 40%: GBP 110,000

For the same estate, if the person were a long-term resident:

Worldwide assets: GBP 2.5 million Nil rate band: GBP 325,000 Taxable estate: GBP 2.175 million IHT at 40%: GBP 870,000

The difference in IHT exposure between a long-term resident and a non-long-term resident is GBP 760,000 on this estate.

The Soft But Critical Next Step

If you are a British expat in Portugal with assets exceeding GBP 500,000, and you have not reviewed your estate plan since April 2025, that review is overdue.

You may find:

• Your long-term resident status (or tail exposure) creates unexpected IHT liability on assets you assumed were protected
• Your current will is optimised for the old domicile-based system and is no longer efficient under the residence-based system
• You have UK and Portuguese assets but only one will, creating ambiguity about which law applies
• A trust structure created years ago is now exposing assets to IHT that should be protected
• Portuguese inheritance law (forced heirship rules) conflicts with your intended distribution in your UK will

The cost of a conversation with an estate planning adviser who understands both UK and Portuguese law (typically EUR 2,000-5,000) is often recovered in tax savings through will restructuring alone.

Most expats who undertake this review are relieved to learn that their situation is manageable or that their assets are already optimally positioned. Some discover significant exposure that requires planning. Nearly all regret having delayed the review.

Final Takeaway

The shift to residence-based UK inheritance tax on 6 April 2025 fundamentally changed the tax planning landscape for British expats. For those who left the UK 10+ years ago, the change is largely beneficial: they are no longer long-term residents, and their IHT exposure is limited to UK-situs assets.

But the transition introduced the IHT tail, which can create unexpected exposure for a period after departure. And for expats with substantial UK and Portuguese assets, the coordination of two separate succession laws and tax systems requires careful planning.

The most successful expats are those who:

• Understand their long-term resident status and whether tail exposure applies
• Have reviewed their wills and confirmed they are optimised for both UK and Portuguese law
• Have separated UK and Portuguese assets into structures that match each jurisdiction's rules
• Have planned for the distribution of their estate in a way that minimises both UK IHT and Portuguese inheritance tax

Most expats who undertake this planning do not change their assets materially. They simply reorganise them, rewrite their wills, and often discover they have GBP 100,000-500,000 in tax savings already available to them.

For British expats in Portugal, that is a conversation worth having.