New UK Domicile Rules
The UK government has made some significant, and complex, reforms to the taxation of non UK domiciled individuals.
The changes impact UK Inheritance Tax liabilities for people living outside the UK .
Under previous rules if you had a UK domicile (and had not lost it) there was a liability to UK IHT on worldwide assets on death. If you were not UK domiciled, the IHT liability extended only to assets in the UK.
Under the new rules (which start to come into force on 5 April 2025), the test of worldwide liability will no longer be a UK domicile test, but a test of long term (basically ten years our the previous twelve) tax residence – referring to the test of residence under UK income tax regulations.
Under the changes long term residents of Italy may lose the liability to UK IHT on worldwide assets earlier than under current rules possibly as early as after 10 full years of non UK tax residence, and sooner than they would have been able to lose their UK domicile.
The replacement of the domicile test which was based on some sometimes intricate concepts of common law, and presented differences within thewhich made it possible, possibly inadvertently, to retain a UK domicile, with a much more black and white test of residence is to be welcomed.
However the changes make little difference to long term residents with assets in the UK given that both domicile or residence are irrelevant to the application of UK inheritance on UK situated assets, which will continue to apply. Even for some one who is no longer considered a non-UK resident, UK situated assets will always remain within the scope of UK inheritance tax, as under the current rules.
The new rules provide more certainty as to when a former UK resident ceases to be liable to UK IHT on worldwide assets, the reforms do raise the question as to whether such individuals can optimize the IHT position by moving assets away from the UK. has made
Summary of the New UK Rules
A Long-Term Residence concept replaces Domicile for Inheritance Tax
From 6 April 2025, the UK has replaced the domicile-based system for Inheritance Tax (IHT) with a residence-based regime under the Finance Act 2024.
This fundamentally changes how IHT applies to worldwide assets for individuals and trusts, aiming to tax long-term UK residents more comprehensively while providing transitional relief. The changes are part of broader reforms to the UK non-dom regime, including the Foreign Income and Gains (FIG) system for income and capital gains tax.
Key Changes
Long-Term Resident Test: An individual is a “long-term UK resident” (LTR) if they have been UK tax-resident for at least 10 of the previous 20 tax years (using the UK Statutory Residence Test for years from 2013/14; pre-2013 rules apply earlier). This replaces the “deemed domicile” rule (15/20 years) for IHT on non-UK assets.
IHT Scope: LTRs pay IHT on worldwide assets (at 40% above the £325,000 nil-rate band). Non-LTRs pay only on UK situs assets.
Application: Applies to outright assets, trust additions, and deaths. Non-UK located assets in trusts set up before 6 April 2025 by non-domiciled settlors remain excluded if the settlor was non-UK domiciled at settlement.
Transitional Rules (for 2025/26 and 2026/27):
Non-UK residents in 2025/26 who were not UK-domiciled on 30 October 2024 get a “three-year tail” (IHT on UK assets only for three years after returning).
Individuals who were non-UK resident for at least 10 years before 6 April 2025 are not LTRs providing they do not to return to the UK and become tax resident there unless they return and meet the 10/20-year test.
Non-LTR spouses of LTRs can elect LTR status for unlimited spouse exemption.
Trusts and Excluded Property
Non-UK assets in trusts set up by non-LTR settlors remain excluded.
If the settlor becomes an LTR after settlement, the trust’s status mirrors the settlor’s (triggering exit charges).
Pre-6 April 2025 trusts retain excluded status if the settlor was non-UK domiciled at settlement.
Nutshell Inheritance Tax For Long Term Residents of Italy
UK IHT
Summarising some extensive legislation and subject to confirmation on a case by case basis, for someone who is Italian tax resident at the time of death, having moved in their lifetime, from the UK or who owns IHT chargeable assets in the UK:
UK IHT applies at the rate of 40% of the value of your estate at death which can be defined as:
- your worldwide estate as long as you continue to meet the ten year test of UK tax residence under the new UK rules;
- the value only of any UK situated assets only to UK situated assets if you are not a UK long term tax resident (as defined) at death.
UK IHT applies above the UK inheritance tax threshold of GBP 325,000 – referred to as the “nil rate band”. The nil rate band can be increased by a further GBP 175,000, applicable to the value of a home – a property used as the deceased’s residence at some point in their lives – which passes to children or grandchildren. However the extra GBP 175,000 exemption may not apply where the deceased is neither domiciled or resident in the UK at the time of death, and is liable to UK inheritance tax only on death.
UK IHT rules also contains some general reliefs such as those for Agricultural Property, Business Property, qualifying UK Government Gilts and certain other financial assets. The availability of reliefs such as these for non UK domiciled/resident individuals needs to be reviewed in each case.
The value of your estate here includes any gifts made in the 7 years prior to death, albeit possibly subject to a lower effective rate, depending on timing.
Italian IHGT, Inheritance and Gift Tax
Italian IHGT applies to worldwide real estate at a maximum rate of 8% on worldwide estate, if you are tax resident in Italy at the time of death.
Where your heirs/beneficiaries are your spouse or your children then the rate is reduced to 4% and there is a Euro 1 million threshold per beneficiary below which no Italian tax applies. The threshold is designed to apply to all amounts transferred by the deceased in the course of their lifetime (so including lifetime gifts as well as the share of the estate on death).
The generosity of the Italian IHT rules (especially compared to other European jurisdictions) has been noted, and every now and again a legislative proposal is made to increase rates and/or reduce the thresholds. So far these proposals without outcome.
The Convention
Background
Italy and the UK entered into a Treaty entitled “Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Italian Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to duties on the estates of deceased persons” in London on 15 February 1966 (the “Treaty”).
The Treaty refers to then applicable UK Estate Duty which was replaced by the current Capital Transfer Tax 1975, and Inheritance Tax in 1986. Article 2(2) of the Treaty states that the Convention applies not only to the taxes listed at the time of signature, but also to:
“any identical or substantially similar duties which are imposed by either Contracting Government after the date of signature of the present Convention in addition to, or in place of, the existing duties.”
HMRC’s manuals and technical guidance demonstrate IHT falls squarely within the scope of these long-standing Treaties.
Purpose
The Treaty’s purpose is to:
prevent double taxation on death, and
allocate taxing rights between the UK and Italy
grant a credit for foreign tax paid against tax in the country of domicile (although this is as far as Italy is concerned simply confirmation of the foreign tax credit available under Italy’s domestic provisions.
Allocation of Taxing Rights.
Since both Countries charge tax on the Estates of Deceased Persons (at the time of signing and currently) on the basis of worldwide assets, the Treaty seeks to resolve any potential conflict where a deceased person was “domiciled” in either country under the domestic definition of domicile.
It does so with a tie-breaker clause (article II).
If both countries consider the individual domiciled, under the domestic definition, the Treaty applies a tie‑breaker based on:
permanent home
centre of vital interests
habitual abode
nationality
mutual agreement
Practical Effects
The basic message, as a result, for long term Italian residents is that
- UK inheritance tax may well be much higher than the Italian tax; and
- UK inheritance tax is always going to apply to UK situated assets;
- Italian inheritance tax may not actually apply in the presence of the Euro 1 million lifetime gift, and Euro 1 million death thresholds per beneficiary and will always apply above those thresholds at lower rates than the UK rates.
Where both UK and Italian inheritance tax applies, a tax credit mechanism either under domestic law or the Treaty should apply such that the overall inheritance tax burden is the higher of the two. We say “should” because the tax credit mechanism may not always, at least without planning, function perfectly, and can complicate the administration of the estate leading to delays and expense.
But the real message is that once you have decided to become a long term resident of Italy, you want to look to transfer assets away from the UK, if you would otherwise remain libale to UK IHT on them.
Optimisation
If you are going to be Italian tax resident for the long term, you want to look first at mitigating the UK inheritance bill. So the focus should be first on checking that you have lost or will eventually lose your UK long term tax residence status under the new rules and whether the Treaty will operate to exempt from UK inheritance tax on worldwide assets once you are residint in Italy. The focus is thus on the possibility of transferring assets away from the UK. If a country other than Italy is chosen as a destination for new investment, then obviously the IHT and CGT rules of that country need to be reviewed.
This raises the question, for Italian tax residents, whether financial investments that would otherwise be liable to UK IHT, could usefully be moved to. From a purely UK inheritance point of view, anywhere outside the UK would do.
Investing via an Italian intermediary is not essential, but if you are here in Italy for the duration that there may be an advantage in considering an Italian financial intermediary as a destination for investment funds. This is because:
- doing so can done be a way that you are no longer responsible for reporting your financial assets and the relevant income in your annual Italian tax return, leaving the chosen Italian financial institution to do the necessary.
- the Italian market offers investments products that can take the value of an investment outside your estate for Italian IHT purposes, meaning that no IHT is due when you pass. This is obviously less of an advantage if no Italian IHT is due anyway depending on values and beneficiaries, but at least there may be a “locking in” of IHT values under the currently applicable IHT regime.
- using Italian intermediary may also considerably ease the administration on death,
- these products can work to defer income tax on the yield from investments to the extent that you do not withdraw funds.
- some of the products may allow you to carry on investing in much the same underlying assets as you are currently invested in.
- the reporting currency is in Euro, so that the financial institution handles Euro/sterling foreign exchange calculations. Here there is a wider issue, namely whether you want to be invested in sterling denominated assets at all whilst living in Euroland.
Some financial products do however have an upfront and ongoing annual cost, so that would need to be factored in. The products may not therefore be suitable for suitable.
Appropriate financial advice needs to be taken from an independent financial adviser based in Italy or regulated financial institution before the making of any investment.
As regards financial investments, any switch may trigger a liability to Italian tax on any capital gains on the increase in value over the years. This is essentially an advance of the tax that will be due, sooner or later – the “later” being the date of your death. But is a potential cost that needs to be factored in.
Practical Effects
The basic message, as a result, for long term Italian residents is that
- UK inheritance tax may well be much higher than the Italian tax; and
- UK inheritance tax is always going to apply to UK situated assets;
- Italian inheritance tax may not actually apply in the presence of the Euro 1 million per beneficiary thresholds )one form lifetime gifts and one for succession) and will always apply at a lower rates than the UK rates.
Where both UK and Italian inheritance tax applies, a tax credit mechanism should apply such that the overall inheritance tax burden is the higher of the two. We say “should” because the tax credit mechanism may not always, at least without planning, function perfectly, and can complicate the administration of the estate leading to delays and expense.
If you want to look at mitigating the UK inheritance bill, then the focus should be first on checking that you have lost or will eventually lose your UK long term tax residence status. Once that has happened, or is going to happen, the possibility of transferring assets away from the UK. If a country other than Italy is chosen as a destination for new investment, then obviously the IHT and CGT rules of that country need to be reviewed.
This raises the question, for Italian tax residents where financial investments that would otherwise be liable to \UK IHT, could usefully be moved to. From a purely UK inheritance point of view, anywhere outside the UK would do.
Investing via an Italian intermediary is not essential, but if you are here in Italy for the duration that there may be numerous advantages in considering an Italian financial intermediary as a destination for the funds. This is because
- doing so can done be a way that you are no longer responsible for reporting your financial assets and the relevant income in your annual Italian tax return, leaving the chosen Italian financial institution to do the necessary.
- the Italian market offers investments products that can take the value of an investment outside your estate for Italian IHT purposes, meaning that no IHT is due when you pass . This is obviously less of an advantage if no Italian IHT is due anyway depending on values and beneficiaries, but at least there may be a “locking in” of IHT values under the currently applicable IHT regime.
- these products also considerably ease the administration on death.
- these products can work to defer income tax on the yield from investments to the extent that you do not withdraw funds.
- some of the products may allow you to carry on investing in much the same underlying assets as you are currently invested in.
- the reporting currency is in Euro, so that the financial institution handles Euro/sterling foreign exchange calculations. Here there is a wider issue, namely whether you want to be invested in sterling denominated assets at all whilst living in Euroland.
The products do however have an upfront and ongoing annual cost, so that would need to be factored in. The products may not therefore be suitable for suitable.
Appropriate financial advice needs to be taken from an independent financial adviser based in Italy or regulated financial institution before the making of any investment.
As regards financial investments, any switch may trigger a liability to Italian tax on any capital gains on the increase in value over the years. This is essentially an advance of the tax that will be due, sooner or later – the “later” being the date of your death. But is a potential cost that needs to be factored in.
Forced heirship rules
A further (non tax) complication is the Italian “forced heirship” rules, which give rights to a spouse, children, grandchildren and parents (the legitimate heirs) to a share of your estate as defined under Italian law. A foreign citizen, even though they are tax resident in Italy can seek to exclude these forced heirship rules, but it is impossible, in our view, to 100% guarantee that heirs who consider that their rights under Italian law have been prejudiced, do not contest the terms of the will, if you are tax resident in Italy at the time of death. It will be necessary to identify who your legitimate heirs are.
Wills
Having identified the tax considerations and identified the legitimate heirs the arrangement for most appropriate form of will or wills can be decided upon.
It should be noted that only around 20% of Italian residents die after having made a will. This is a reflection of the forced heirship rules which means that on the whole the estate of deceased person passes to the spouse/civil partner and children in determined proportions. A surviving spouse or civil partner is also guarantee by the law a right of habitation” – a registrable legal right to occupy a property occupied as primary residence for the rest of their lives, as will as the right to use the chattels in the family home.
In the presence of the forced heirship and intestate succession rules you may wish simply to let Italian law handle your accession and go with the flow. If, in your particular circumstances you estate is going to pass to a spouse/civil partner/children, there may not be much point in making a will at all.
However there are a number of reasonable reasons for making a will in the following circumstances:
Where you would like to indicate third party beneficiaries outside the family, ideally within the scope of the “Disposable Share”, for a part of the estate or certain determined assets or objects of affection.
Where passing part of your estate to a spouse/civil partner, could increase the overall inheritance tax bill, as a result of “bunching” assets in the estate of your
Where you might want to “skip a generation” and leave your estate to grandchildren, where your children are considered able financially to “look after themselves” and where bequeathing your estate to them could
However it is possible even within the forced heirship rules for a part of the estate to pass to third parties. Transferring a share of the property to the surviving spouse may not be efficient in inheritance tax terms if the value of the relevant shares of the estate exceeds the inheritance tax thresholds.
Also some thought needs to be given to the “probate” process for the Italian bank account. The bank will not release the funds as a general rule until they are satisfied that all Italian tax debts have been paid and the beneficiaries have been identified. If this involves “proving” a UK will this might give rise to considerable delay and expense.
To give any kind of meaningful advice and advise on any planning that might be usefully undertaken, we need:
1) as accurate a listing as possible of all of your assets, the place in which they are located, the current value, the purchase price (or base costs for financial assets);
2) a listing of to whom you would like your estate to go and in what shares;
3) a listing of your family members, names, dates of birth, place of residence and legal relationship to you;
4) whether you intend to, or might, return to the UK, as a resident, at any stage in the future.
5) the options as you see them in terms of gifting part of your estate to heir during your lifetime (bearing in mind that once you make a gift you cannot change your mind).
Links to Sources
The Treaty Text – UK Government website
UK – Italy Estate/Succession Duty Treaty
The Treaty Text – Italian Official Gazette
You can find the text of Treaty with a side by side translation here.