UK: UK Inheritance Tax Overhaul: Implications for Wealth Management and Asset Allocation

The UK’s proposed Inheritance Tax (IHT) reforms, unveiled in 2025, mark a seismic shift in how wealth is taxed and transferred. Faced with a £40 billion fiscal gap and a rapidly evolving wealth landscape, the government is recalibrating IHT to target intergenerational wealth more effectively. These changes—lifetime gifting caps, taper relief adjustments, and expanded asset inclusion—will reshape estate planning for high-net-worth individuals (HNWIs) and ultra-HNWIs, creating both risks and opportunities.

The Fiscal Imperative and Policy Shifts
The UK’s fiscal strategy hinges on avoiding higher taxes on “working people,” as outlined in the 2024 election manifesto. With debt servicing costs rising and global trade tensions (e.g., Trump-era tariffs) straining public finances, the Treasury has turned to wealth taxation. The reforms aim to close loopholes in IHT, particularly for assets like property and pensions, which have appreciated significantly over decades. For instance, the inclusion of unused pension pots in IHT from 2027—a move criticized for its complexity—signals a broader effort to tax wealth at its source.

A key innovation is the proposed lifetime gifting cap, which would limit the amount individuals can give away to reduce IHT liabilities. Currently, gifts made seven years before death escape taxation, while those made earlier are subject to a sliding taper relief (32% to 8%). A cap would prevent large-scale gifting as a tax avoidance tactic, potentially boosting IHT revenues by billions. Similarly, adjustments to taper relief could narrow the window for strategic gifting, forcing estates to retain more wealth until death.

The Residency-Based Tax Regime: A Global Challenge
The reforms also shift IHT from a domicile-based to a residency-based system, a move with profound implications for globally mobile families. Non-domiciled individuals who reside in the UK for more than 10 years will face a 40% IHT rate on their worldwide assets. This eliminates the traditional “remittance basis” of taxation, which allowed non-residents to shelter offshore assets from UK IHT.

Peter Ferrigno, an international tax expert, warns that this shift could deter HNWIs from choosing the UK as a residency destination. Unlike jurisdictions such as Switzerland or Italy, which offer flat tax regimes or lump-sum taxation for new residents, the UK’s approach lacks incentives for wealth retention. The four-year foreign income and gains (FIG) exemption—a temporary reprieve for new residents—is insufficient to offset long-term tax exposure.

Strategic Adaptations: Trusts, Insurance, and Residency Planning
To mitigate these risks, HNWIs are adopting sophisticated strategies:

Offshore Trusts and Holding Structures: Offshore trusts, particularly those in jurisdictions with favorable IHT regimes (e.g., Singapore, the Cayman Islands), are being used to insulate assets from UK taxation. For example, a UK expatriate family might establish a trust in Singapore to hold property and equities, ensuring these assets remain outside the IHT net even if the settlor later returns to the UK.

Life Insurance in Trust: Life insurance policies written in trust provide liquidity to cover IHT liabilities, preventing forced asset sales. A case study from the Spring 2025 Quarterly Technical Briefing highlights a Belgian family using insurance proceeds to pay IHT on a UK property, preserving the estate for beneficiaries.

Cross-Border Residency Timing: Families are carefully managing residency timelines to avoid triggering IHT liabilities. For instance, a French expatriate in Dubai might delay a return to France to minimize UK residency exposure, while leveraging gifting strategies to reduce taxable estates.

Asset Reallocations: With pensions and property now in the IHT net, HNWIs are diversifying into assets less susceptible to inheritance taxation. This includes offshore private equity, structured debt instruments, and digital assets, which may offer more flexibility in estate planning.

Opportunities in Regulatory Uncertainty
While the reforms pose challenges, they also create opportunities for proactive investors. The closure of loopholes in agricultural and business property relief, for example, has spurred demand for alternative wealth preservation tools. The introduction of a £1 million allowance for 100% relief on qualifying property (indexed to CPI) provides temporary stability for estates, but the long-term trend toward stricter IHT rules necessitates agile planning.

Proactive Steps for Investors
To navigate this evolving landscape, investors should:
– Engage Cross-Border Experts: Work with legal and tax advisors who specialize in multi-jurisdictional planning to exploit regulatory differences.
– Leverage Insurance and Trusts: Use life insurance in trust to ensure liquidity and preserve asset control.
– Time Residency Strategically: Avoid prolonged UK residency if offshore assets are a priority.
– Diversify Asset Classes: Shift toward assets with lower IHT exposure, such as offshore private equity or structured notes.

Conclusion
The UK’s IHT overhaul reflects a broader global trend toward taxing wealth more aggressively. While the reforms aim to ensure fairness, they also introduce complexity and uncertainty. For HNWIs, the key to success lies in proactive, adaptive planning. By leveraging offshore structures, insurance-based solutions, and strategic residency management, investors can mitigate risks and even capitalize on shifting regulatory dynamics. As the Treasury tightens the screws on inheritance, the most resilient portfolios will be those that anticipate change and act decisively.