The new UK inheritance trap for UK NRIs, whether living in UK or Returning to India
- 3 days ago
- 7 min read
From 6 April 2025, the UK scrapped domicile and rebuilt its tax system around residence. For NRIs planning a permanent return home, this rewrites the timeline, the strategy, and the inheritance tax exposure of the move.
For decades, the UK's "non-domiciled" (non dom) regime gave Indians living and working in Britain a powerful set of wealth preservation advantages. That era has now ended. Effective 6 April 2025, the government abolished the historic domicile based system and replaced it with a strict residence based framework.
For Non Resident Indians (NRIs) in the UK, the shift has huge consequences for global wealth.
Contents
Need help planning your return? Contact us at Reyman Wealth. Our team of experts is always happy to help.
Old vs new: from domicile to residence
Under the old regime, liability to the UK's 40% Inheritance Tax turned on domicile (broadly, where you treat as your permanent home).
You became "deemed domiciled" for Inheritance Tax (IHT) only after being UK tax resident for 15 of the previous 20 tax years. Until then, only your UK situated assets sat within the IHT net.
From 6 April 2025, domicile is no longer the test. Everything now turns on residence. The new Foreign Income and Gains (FIG) regime governs how arrivals are taxed, and a new long term residence test governs IHT on the way out.
The FIG regime
The remittance basis is gone. In its place, the FIG regime gives qualifying new arrivals their first four tax years of UK residence free of UK tax on most foreign income and gains. Unlike the old remittance basis, those funds can be brought into the UK with no further charge. Eligibility requires at least 10 consecutive prior years of non-UK residence. Understanding where you sit on this clock matters as much on arrival as on departure.
The 10-year "Long-Term Resident" trap
Under the new rules you become a Long Term Resident (LTR) once you have been UK tax resident for 10 of the previous 20 tax years.
Cross this line and your worldwide estate (property in India, offshore accounts, global investments) falls fully into the UK IHT net.
The status is sticky. The LTR clock only resets after you have spent 10 consecutive tax years outside the UK. It's extremely punitive, almost unnecessarily so.
The "IHT Tail"
Leaving the UK does not switch off your IHT exposure on the day your flight lands. If you depart as a Long Term Resident, your worldwide assets stay within reach of UK IHT for a set number of years afterwards, scaling with how long you lived in the UK.
Years UK resident (of previous 20) | Non-UK years needed to shed the "tail" |
0 – 9 | 0 — no worldwide IHT exposure |
10 – 13 | 3 years |
14 | 4 years |
15 | 5 years |
16 | 6 years |
17 | 7 years |
18 | 8 years |
19 | 9 years |
20+ | 10 years |
The rule: a flat 3-year tail for 10–13 years of residence, then one extra year for every additional year of residence, capped at 10.
So an NRI who lived in the UK for 20 years and returns to India in 2026 keeps their global estate inside the UK IHT net for a full decade after departure.
The UK IHT rates and allowances
The headline rate is 40%.
This applies only to the part of an estate above the tax free allowances. Those allowances matter enormously once you are a Long Term Resident, because they are then set against your worldwide estate, not just your UK assets.
Tax-free allowances
Allowance | Amount | When it applies |
Nil-rate band (NRB) | £325,000 per person | Everyone. Frozen until April 2031. |
Residence nil-rate band (RNRB) | £175,000 per person | When a main home passes to children, grandchildren or other direct descendants. |
Individual total | up to £500,000 | NRB + RNRB combined. |
Married couple / civil partners | up to £1,000,000 | Unused bands transfer to the surviving spouse. |
The RNRB tapers away by £1 for every £2 by which the estate exceeds £2 million — so it is lost entirely above roughly £2.35m for an individual (about £2.7m for a couple).
Reyman Tips: Example — how the residence band disappears
Priya is a returning NRI and a Long Term Resident, so her worldwide estate is in the UK IHT net. She plans to leave her Mumbai flat to her children, which normally unlocks the £175,000 residence band. But because her estate is over £2 million, that band is clawed back. The bigger her estate, the less of it she keeps:
| Estate £1.9m | Estate £2.2m | Estate £2.4m |
Amount over the £2m line | £0 | £200,000 | £400,000 |
RNRB withdrawn (½ of the excess) | £0 | £100,000 | £200,000 (capped) |
Residence band remaining | £175,000 | £75,000 | £0 |
Nil-rate band (flat) | £325,000 | £325,000 | £325,000 |
Total tax-free allowance | £500,000 | £400,000 | £325,000 |
Take the middle column:
Priya's £2.2m estate gets a total allowance of £400,000, so £1.8m is taxable at 40% an IHT bill of £720,000.
Had the residence band not been tapered, her allowance would have been £500,000 and the bill £680,000.
The taper alone costs her an extra £40,000 (40% of the £100,000 of residence band she lost).
Last column:
By £2.4m her residence band has vanished entirely.
She is left with just the flat £325,000, exactly the same as someone who leaves no home to their children at all.
For wealthy returnees this is the norm, not the exception.
The headline "£500,000 each" rarely survives contact with a real cross border estate.
Reyman Tips: Work with your CA/ Advisor to manage your estate tax liability. Some preventive planning can help you avoid the large estate tax exposure on global assets.
Need help? Let’s talk.
Reyman Wealth helps returning Indians with planning their return to India, planning your RNOR period, resetting your cost basis and overall financial planning.
The rates
Situation | Rate |
Estate value above the available allowances | 40% |
Estate where at least 10% is left to charity | 36% |
Gifts into trust during your lifetime (chargeable lifetime transfer) | 20% upfront |
Gifts to individuals within 7 years of death | Sliding scale (below) |
Gifts during IHT trail
Lifetime transfers in scope. IHT isn't only charged when you die. It can also bite on gifts you make while alive (lifetime transfers). For a Long Term Resident, this applies to your worldwide assets, not just UK ones. So gifting your flat in Mumbai or your offshore portfolio to your children is now potentially within the UK IHT system.
The 7-year clock on PETs (Potentially Exempt Transfers). Most outright gifts to individuals are "Potentially Exempt Transfers" (PETs). The "potentially" is the key word. The gift becomes fully exempt from IHT only if you survive 7 years after making it. If you die within those 7 years, the gift is pulled back into your estate and can be taxed at up to 40% (with some taper relief on the rate after year 3). So the "survivorship clock" is the 7-year countdown that has to run out before a gift is truly safe.
Basically, once you're an LTR, you can't simply give your global wealth away to escape IHT. The gift only escapes if you live another 7 years and that exposure now reaches your Indian and offshore assets, not just UK ones.
Taper relief on gifts made within 7 years
Die sooner than 7 years and the gift is pulled back into your estate, with the rate tapering down the longer you survived:
Years between gift and death | Rate charged on the gift |
0 – 3 years | 40% |
3 – 4 years | 32% |
4 – 5 years | 24% |
5 – 6 years | 16% |
6 – 7 years | 8% |
7+ years | 0% — fully exempt |
How to plan your return strategically
If you are an Indian national planning the move home, your strategy has to bridge two rulebooks at once: the UKs exit rules and India's entry rules.
The clocks overlap, so sequencing is everything.
Time your exit carefully
If you are approaching the 10 year mark, this is a hard deadline. Leaving before you trigger the 10th year of UK tax residence avoids LTR classification entirely. Your non UK assets never enter the IHT net and there is no tail to manage.
Reyman Tips: Work with your CA to ensure you time your exit perfectly. A few days can turn out to be extremely costly here.
Prepare for the tail
If you have already passed 10 years, returning to India means carrying the tail (3 to 10 years) with you.
Through that period your Indian assets could be taxed at 40% in the UK on death. Term life insurance sized to the estimated IHT bill is a common mitigation strategy but work with your advisor to figure out the best strategy for you.
Gift before you become an LTR
Gifts made while you are not an Long term resident sit outside the worldwide IHT net.
Once you cross the line, lifetime transfers of global assets are in scope and the 7 year survivorship clock on potentially exempt transfers applies worldwide. Front-loading gifting before LTR status is one of the cleaner levers available.
Leverage India's RNOR window & Reset your cost basis
Keep separate succession documents
Never mix jurisdictions. Hold a localized Indian Will covering Indian assets and a separate UK Will limited strictly to UK situated assets. If a UK Will attempts to govern your Indian assets, you forfeit the protections of the 1956 Treaty (below).
The 1956 UK–India Estate Duty Treaty: a lifeline?
Many Indians have historically relied on the 1956 treaty.
This treaty contains a unique provision: if you die domiciled in India, primary taxing rights over non UK assets are allocated to India. Because India abolished Estate Duty, this effectively shielded non-UK assets from UK IHT.
The UK has signalled it does not intend to unilaterally tear up double taxation treaties, but relying on the 1956 treaty alone after 2025 is risky:
Reyman Tips: Why relying on the treaty alone is risky? Death only: It applies on death. Not to lifetime charges such as transfers into trust or gifts where you die within seven years. Burden of proof: Your estate must rigorously prove to HMRC that you never acquired a UK "domicile" and always intended to return to India. Will restrictions: The protection fails if your non-UK assets pass under a UK-regulated Will.
Reyman Thoughts:
The new estate tax brings tax and succession planning extremely important for UK NRIs as well as people returning to India. Managing the risk is critical to ensure your descendents don't end up with a huge tax bill. Need help planning your return? Contact us at Reyman Wealth. Our team of experts is always happy to help.
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