IHTM47022 - Long-term UK residence test: Transitional provisions: Excluded property comprised in a settlement at 30 October 2024
Source: gov.uk (2025-12-02)


This manual text reflects changes outlined in the Finance Bill 2025, which has not yet received Royal Assent.

Where excluded property (IHTM04251 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04251)) under IHTA84/S48(3) or S48(3A) (“specified excluded property”) was comprised in a settlement immediately before 30 October 2024, this will not be subject to charges under the gift with reservation provisions (IHTM14301 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14301)) or certain charges under the qualifying interest in possession regime (IHTM16061 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm16061)) in the circumstances explained below.

In addition, relevant property charges will be capped at £5m per ten year cycle.

IHTA84/S48(3) covers foreign property comprised in a settlement where the settlor was domiciled outside of the UK (IHTM13000 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm13000)) when the property became comprised in the settlement and IHTA/S48(3A) covers holdings in Authorised Unit Trusts (AUTs) or a share in an Open-Ended Investment Company (OEIC) where the settlor was domiciled outside of the UK when the property became comprised in the settlement.

The property must also be foreign property or a holding in an AUT or a share in an OEIC at the time of the charge for the transitional provision to apply.

However, specified excluded property which was comprised in a settlement immediately before 30 October 2024 may be subject to charges under the relevant property regime (IHTM42161 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42161)) from 6 April 2025 (IHTM47052 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47052)) with a cap of £5m per ten year cycle.

Qualifying interest in possession

Specified excluded property comprised in a qualifying interest in possession settlement (IHTM4 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47051)7051 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47051)) before 30 October 2024 will not be subject to charge when the qualifying interest in possession comes to an end (IHTM16091 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm16091)) or on the death of the qualifying interest in possession beneficiary (IHTM04043 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04043)).

After the existing qualifying interest in possession ends, and for qualifying interest in possession settlements made on or after 30 October 2024, the settlement will be subject to the new long-term residence rules relating to the settlor and/or the current beneficiary, which you will find at (IHTM47 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47050)050 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47050)).

Gifts with reservation of benefit

Specified excluded property comprised in a settlement immediately before 30 October 2024 will not be subject to the gift with reservation of benefit rules (IHTM14396 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14396)).

Relevant property charges

Proportionate charges and ten year anniversary charges on specified excluded property are subject to a cap, so that the maximum charges in a relevant period are £5m.

The first relevant period is from 6 April 2025 to the first or next ten year anniversary of the trust. For this first relevant period, the cap is prorated by multiplying £125,000 by the number of whole successive quarters in the period.

Each subsequent period of 10 years is a relevant period, beginning with the day after the ten year anniversary and ending with the next ten year anniversary.

Proportionate charges in each relevant period are calculated as normal and paid until the £5m cap is reached. Once £5m has been paid by way of proportionate charges, there will be no further tax due on the next ten year anniversary or any exits before that (but returns are still required).

Tax paid on specified excluded property at any proportionate charge reduces the cap on later occasions of charge in the relevant period. So, if £2m tax was paid on an exit from the trust in year 2, the cap at the next exit would be £3m. If there is another exit in year 5 and £1.5m tax was paid, the cap at the next event would be £1.5m. So if there was another event in year 7 and the tax is £2m, the cap applies and only £1.5m is payable. Then, at the next ten year anniversary, no further tax is due as the full £5m has been paid for the relevant period.

There is then a reset of the cap for the next relevant period.

Limitations

As UK situs assets, or indirectly owned UK residential property (IHTM04311) (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04311)comprised in a settlement are not specified excluded property they will not benefit from this transitional protection, even if they are later sold and become foreign situs.

Additions to existing settlements (IHTM16074 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm16074)) or new settlements made on or after 30 October 2024 cannot benefit from transitional protection, so that foreign settled property will be excluded property (or not) in accordance with the new long-term residence tests that relate to the settlor (IHTM47050 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47050)).

The exemption is limited to property which meets the criteria of being specified excluded property as at 30 October 2024 and is also foreign property or a holding in an AUT or a share in an OEIC at the time of the charge. However, if there is property in an existing settlement which is specified excluded property as at 30 October 2024 and meets the other conditions at the time of charge, an addition of property to the settlement after 30 October 2024 which cannot itself meet that criteria will not prevent the original property benefitting from the transitional protection. Also, if property qualified as specified excluded property as at 30 October and part of it meets the conditions at the time of charge and part of it doesn’t, the part which meets the conditions will benefit from the transitional protection; the part which doesn't meet the criteria will not prevent the qualifying part from benefitting.

Example 1

Trevor is UK domiciled and was resident in the UK all of his life until becoming and remaining non-resident from 2022-23. He put £100,000 and a foreign property into a settlement he made on 31 December 2020.

The foreign property in Trevor’s settlement did not qualify as excluded property on 30 October 2024 because he was UK domiciled at the time the property became comprised in the settlement.

If Trevor can benefit from the settlement, the gift with reservation of benefit provisions apply to treat the assets as part of Trevor’s estate if he dies before 6 April 2032 as he would still be long-term UK resident.

If Trevor’s settlement consists of relevant property, that regime will also apply until Trevor ceases to be a long-term UK resident. That means there is a charge on the ten-year anniversary on 31 December 2030.

From 6 April 2032, foreign property in Trevor’s settlement would be excluded property, because he is no longer long-term UK resident. The gift with reservation of benefit provisions would not apply on death or cessation of reservation whilst he was not a long-term UK resident.

There will also be an exit charge (IHTM42110 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42110)) when Trevor ceases to be long-term UK resident on 6 April 2032 in respect of the foreign property ceasing to be relevant property.

Example 2

Zhanti is non-domiciled and was UK resident for 17 years, so was deemed domiciled under the pre-April 2025 rules. She became non-resident from 2024-2025 and does not return to the UK.

So, she became a long-term resident from 6 April 2025 but ceased to be a long-term resident from 6 April 2027 as a result of the separate transitional rule for residence (IHTM47021 (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm47021)).

If Zhanti made a settlement before she became deemed domiciled, any specified excluded property comprised in the settlement as at 30 October 2024 will benefit from the transitional provisions and will not be subject to the gift with reservation of benefit provisions or charges under the qualifying interest in possession provisions, if applicable. In addition, the tax charged on such property cannot exceed £5m in any 10-year period.

If Zhanti’s settlement has UK assets or assets within Schedule A1 IHTA 1984 (overseas property with value attributable to UK residential property) then such property will not benefit from this treatment, even if it is later sold and becomes foreign situs

If Zhanti’s settlement comprises relevant property, that regime will apply to both UK and foreign settled assets from 6 April 2025 until Zhanti ceases to be long-term resident on 6 April 2027.

This means that, if there is a ten-year anniversary after 6 April 2025 while Zhanti is a long-term resident, i.e. 2025-2026 and 2026-2027, then both UK and foreign settled assets will be chargeable.

There will be an exit charge in relation to the non-UK assets (which become excluded property) when Zhanti ceases to be long-term resident on 6 April 2027.

Example 3

Arnold is non-domiciled and settled a trust in 1990 with non-UK property, before he became deemed domiciled. The Arnold Trust gave an interest in possession to Chidi, who has always been UK domiciled and resident. On Chidi’s death, there is an interest in possession for his sister Linda.

The non-UK property in the Arnold settlement was excluded property as at 30 October 2024 and so benefits from the exemption from qualifying interest in possession charges whilst Chidi’s interest in possession subsists.

Chidi dies on 8 July 2026 and Linda’s interest in possession begins. The protection from qualifying interest in possession charges applies so that the value of the foreign trust property is left out of Chidi’s estate on death.

Linda’s interest is not a qualifying interest in possession so that the non-UK settled property will then be subject to the relevant property regime, and a 10-year anniversary charge will arise in 2030 unless it is excluded property under the new rules, which will depend on Arnold’s long-term residence status at that time.

Example 4

Flora made a settlement from which she could benefit in 1998 when she was not domiciled in the UK. The property in the settlement is a house in Spain. Flora has lived in the UK since 2000.

At 30 October 2024, the settled property is specified excluded property.

On 7 March 2025, the Spanish property was sold and the 500,000 euro sale proceeds were placed in a Spanish bank account. On 8 June 2025, 100,000 euros was moved to a UK sterling account with a UK bank.

On 18 August 2026, Flora added US shares worth $700,000 to the trust.

Flora dies on 7 July 2029 and is still a long-term UK resident.

The UK sterling bank account cannot benefit from the transitional provision because, at the time of Flora’s death, it was not foreign property or invested in an AUT or OEIC. The bank account will be subject to the gift with reservation of benefit provisions and treated as part of Flora’s estate.

The US shares also cannot benefit from the transitional provision as they were not settled property as at 30 October 2024. The bank account will be subject to the gift with reservation of benefit provisions and treated as part of Flora’s estate.

However, the Spanish bank account with the remaining 400,000 euros can benefit from the exemption as it was specified excluded property at 30 October 2024 and was foreign settled property at the time of Flora’s death. So, the Spanish bank account is not subject to the gift with reservation of benefit provisions at Flora’s death.

If some of the 400,000 euros had been invested in UK shares before Flora’s death, but these were sold and the proceeds returned to the Spanish bank account before 7 July 2029, the transitional provision would still be available, as the requirement is only that the property was foreign property (or an AUT or OEIC) at 30 October 2024 and the date of death.

Example 5

Pamela created a trust on 7 November 2010 when she was non-domiciled with non-UK assets worth £250m. She became deemed domiciled in 2022 and has been a long-term UK resident since 6 April 2025.

At the trust’s 10-year anniversary on 7 November 2030, the charge (based on a value of £250m) would otherwise be in the region of £6.4m (after rate relief) and that exceeds the applicable cap, which is £2.75m (22 full quarters multiplied by £125,000). So as there are no previous exit charges in the period only £2.75m is payable by the trustees.

There is a distribution of £20m from the trust on 9 June 2034. The charges will be:

A proportionate charge of £420,000 (£20m x (say) 6% x (14/40))

At the trust’s ten year anniversary on 7 November 2040, the charges will be

A capped TYA charge of £4.58m (£5m - £420,000)