Tax Aspects of Inheritance in the United Kingdom

Immigration Aspects Between Israel and the UK

If you own assets in the UK – in London, Manchester, or anywhere else – or expect to inherit assets in the country, it is important to understand the legal and tax implications involved in the inheritance process. This is because even someone who is not a UK resident may still be required to pay tax under local law.

As of 6 April 2025, substantial changes came into force in the UK inheritance tax system. These changes are not merely technical. They change the way tax liability is assessed, particularly for individuals immigrating to or emigrating from the UK, as well as for Israelis with assets or family connections in the country.

Because of the high tax rates, which may reach up to 40% of the value of the estate, inheritance tax has become a key consideration for anyone planning their financial future in the UK. An early understanding of UK law, proper will planning, a review of residence status, and making gifts during one’s lifetime may all significantly reduce tax exposure and help avoid legal and administrative complications later on.

In addition, where families have ties to both Israel and the UK, it is necessary to consider not only inheritance tax itself, but also questions of residence, capital gains tax, the application of tax treaties, the implications of changing countries, and the practical manner in which assets are realized and received.

What Is the Difference Between Inheritance Tax and Estate Tax?

Estate tax is a tax imposed on a deceased person’s assets before they are transferred to the heirs.

Inheritance tax, by contrast, is sometimes viewed as a tax imposed on the assets received by the heir.

Despite this conceptual distinction, in practice, in the UK the tax is imposed on the estate itself and not on the heirs personally. So in substance it is an estate tax, even though its official name remains Inheritance Tax.

Inheritance Tax in the UK – What Should You Know?

UK inheritance tax (IHT) applies to the estates of individuals after death, and it involves a complex system of tax rates, exemptions, reliefs, and special rules. Its application is affected, among other things, by the location of the assets, the deceased’s residence status, and at times also by rules of international law and cross-border taxation.

Inheritance tax does not apply only upon the death of the deceased. In certain cases, it may also apply to transfers of assets made during lifetime, including gifts.

When Does Inheritance Tax Not Apply?

UK law includes a range of exemptions and reliefs. Some apply to transfers made during the deceased’s lifetime, some apply to estate assets upon death, and some apply in both situations.

Among other things:

• Transfers between spouses are generally exempt from inheritance tax.
• Transfers of business property and agricultural property may be exempt, in whole or in part, depending on the circumstances.
• Gifts made more than seven years before the deceased’s death may be exempt from inheritance tax.
• There is a basic inheritance tax nil-rate band of £325,000.
• If part of the estate is left to a direct descendant, an additional relief of £175,000 may apply, subject to conditions.
• If at least 10% of the estate is left to charity, the tax rate may be reduced from 40% to 36%.

As a rule, above the exemption threshold, inheritance tax applies at a rate of 40% to assets transferred on death. Different rules, and at times different tax rates, may apply to certain transfers made during lifetime.

Domicile Rules in the UK – Historical Background

For decades, the rules of domicile played a central role in determining an individual’s tax liability in the UK, particularly in relation to inheritance tax, foreign income, and capital gains outside the UK.

Traditionally, a person was born with a “domicile of origin,” usually derived from the father’s domicile, and could acquire a “domicile of choice” in another country if they could prove that they had moved the center of their life there on a permanent basis. In practice, however, this was not always easy to prove.

As a result, even migrants who had lived in the UK for many years, including Israelis, were often still regarded as having a foreign domicile if they could show that they intended to leave the UK in the future. This status had significant tax consequences, both in relation to foreign income and capital gains and in relation to the scope of inheritance tax on assets outside the UK.

The Domicile Test up to 5 April 2025

Previously, the deceased’s permanent place of residence – domicile – played a central role in determining the scope of inheritance tax.

As a rule:

• If the deceased had a UK connection for domicile purposes, inheritance tax could apply to their worldwide assets.
• If the deceased was not regarded as having a UK domicile, inheritance tax generally applied only to assets located in the UK.

For tax purposes, deemed domicile rules were also developed. Among other things, a person who was a UK resident for 15 out of the 20 tax years preceding the relevant year could be treated as having a UK domicile for tax purposes, even if their personal or family origins were outside the UK.

Accordingly, for estates of deceased persons who died on or before 5 April 2025, determining the tax liability required an examination of the old domicile rules and the deemed domicile rules in force at that time.

What Changed as of 6 April 2025?

As of 6 April 2025, a major structural change came into effect: the UK inheritance tax regime ceased to be based primarily on domicile and moved to a residence-based model.

Under the new regime:

• Assets located in the UK will continue to be subject to UK inheritance tax, regardless of the deceased’s status.
• Assets located outside the UK will be subject to UK inheritance tax only if the deceased is considered a Long-Term Resident (LTR) of the UK.

An individual will be considered an LTR if they were a UK resident for 10 out of the 20 tax years preceding the chargeable event, including death.

The practical meaning is that an individual who meets this test may be liable to UK inheritance tax on all of their worldwide assets, and not only on their UK assets.

By contrast, an individual who has not accumulated 10 years of residence out of the 20 years preceding the chargeable event will not be liable to UK inheritance tax in respect of assets located outside the UK, although there may still be liability with respect to assets located in the UK itself.

What Happens After Leaving the UK?

One of the most important points in the new amendment is that inheritance tax liability does not necessarily end immediately upon leaving the UK.

Where an individual who was an LTR leaves the UK and becomes non-resident for tax purposes, they may remain exposed to inheritance tax on assets outside the UK for an additional period, sometimes referred to as a “tail period.”

In some cases, this period will be 3 years; in others, 4 or 5 years; and in cases of longer residence, it may gradually extend up to a maximum of 10 years.

In general:

• An individual who was a UK resident for 13 years or less may continue to be treated as an LTR for 3 full tax years after departure.
• Each additional year of residence beyond that may extend the period by an additional year.
• The period may extend up to a maximum of 10 tax years.

After 10 consecutive years of non-residence, the count resets. In that case, the individual is no longer subject to UK inheritance tax on assets located outside the UK, and if they return to the UK in the future, their status will be examined again under the relevant residence rules.

Abolition of the Non-Dom Regime and Introduction of FIG

The changes introduced in 2025 do not affect inheritance tax alone.

As of the 2025/26 tax year, the UK abolished the domicile-based system for income tax and capital gains tax purposes, and replaced it with a new regime known as Foreign Income and Gains (FIG).

Under the new regime, the focus shifts from the question “What is your domicile?” to the question “Are you a UK resident?” In certain cases, the new regime provides relief for foreign income and foreign capital gains for a period of up to 4 years, subject to the conditions of the applicable law.

This effectively brings the longstanding Non-Dom regime to an end, after years in which it was one of the most well-known and controversial tax regimes in the UK.

For anyone considering relocating to the UK, returning from the UK to Israel, or holding assets in both countries, this is a dramatic change that requires renewed planning.

Gift Tax in the UK

There is no separate standalone gift tax regime in the UK. Instead, gifts are dealt with within the inheritance tax framework.

When a person transfers an asset as a gift during their lifetime, it is necessary to examine whether the transfer qualifies for exemption, or whether it may be included in the inheritance tax calculation if the donor dies within a certain period.

In many cases, a gift to another individual will be classified as a Potentially Exempt Transfer (PET). This means the gift will not be subject to inheritance tax if the donor survives for seven years from the date of the gift.

This is the “seven-year rule,” and it is a key tool in intergenerational transfer planning.

If the donor dies within seven years of the transfer, inheritance tax may apply to the portion exceeding the exemption threshold. Where between three and seven years have passed from the date of the gift until death, taper relief may apply, gradually reducing the tax burden.

Gift With Reservation of Benefit

A particularly important point is that not every gift truly “leaves” the estate for tax purposes.

If the donor continues to benefit from the gifted asset – for example, transfers a property to their children but continues to live in it or use it without paying full consideration as required by law – the asset may still be treated as remaining in their estate for inheritance tax purposes.

This rule is known as a gift with reservation of benefit, and it may completely negate the tax advantage of making the gift.

Accordingly, before transferring assets by way of gift, it is very important to examine not only the transfer itself but also how the asset will be used afterward.

Residence Testing Under UK Law – Statutory Residence Test

UK tax residence is not determined solely by a person’s general declarations, but rather by a structured statutory test – the Statutory Residence Test (SRT).

This test is based on a combination of the number of days spent in the UK together with “ties” to the UK, such as work, family, accommodation, regular presence, and other circumstances.

The more ties an individual has to the UK, the fewer days of presence may be required for them to be treated as a UK tax resident.

Therefore, anyone seeking to break UK residence, or alternatively to avoid becoming a UK resident, should examine their position under this test in a concrete manner and not rely on a general assumption that physically moving to another country resolves the issue.

The Tax Treaty Between Israel and the UK – And What It Does Not Solve

The tax treaty between Israel and the UK may help prevent double taxation in certain situations, and it is therefore certainly important.

However, it is important to understand that it cannot be relied on in every area, and in particular one must carefully examine whether the treaty governs the relevant issue. In estate, inheritance, and gift matters, it is incorrect to assume automatically that the treaty will solve the problem.

Accordingly, even if for income tax or residence purposes the treaty may determine that the person is an Israeli resident, that does not mean UK inheritance tax will not apply. A separate review of the specific UK law is required.

Capital Gains Tax Upon Leaving the UK

Individuals who are UK residents may be liable to capital gains tax on a worldwide basis.

When an individual leaves the UK and ceases to be a UK tax resident, UK capital gains tax may not apply during the period of non-residence to certain gains accrued during that period. However, UK law includes special Temporary Non-Residence rules.

These rules are designed to prevent a situation in which a person leaves the UK only for a short period, realizes assets outside the period of residence, and then returns to the UK while seeking to avoid tax.

Accordingly, every case involving departure, realization of assets, and return to the UK should be examined carefully to avoid a retroactive capital gains tax charge.

Exit Tax and Future Taxation in Israel

In Israel, unlike in the UK, there is no inheritance tax or estate tax.

However, this does not mean there are no tax consequences at all. In some cases, capital gains tax may apply upon the sale of an inherited asset, and where residence is transferred from Israel to another country, exit tax may apply under Israeli law.

Accordingly, when a person moves between Israel and the UK – or holds assets in both countries – the full tax picture must be examined, rather than focusing only on whether inheritance tax applies.

Capital Gains Tax on Inherited Assets and Step Up

When an individual dies in the UK, assets subject to inheritance tax generally receive an adjustment to their market value at the date of death. This mechanism, known as a Step Up, may reset the capital gain accrued up to that date for future tax purposes.

By contrast, in Israel an equivalent mechanism does not always apply in the same way, and each case must be examined according to the deceased’s place of residence, the type of asset, the identity of the heirs, and the instructions of the Israel Tax Authority.

This means that a particular asset may be treated very differently in the UK than in Israel. Early planning can therefore be critical in relation to the timing of sale, the holding structure, the allocation of assets among heirs, and the overall tax cost.

Inheritance Taxation in Israel Compared With the UK

In Israel there is no estate tax or inheritance tax, but in the UK inheritance tax may be very significant.

In addition, even where the inheritance itself is not taxed in Israel, future actions involving the asset – especially its sale – may give rise to tax liability.

Accordingly, in cases involving an inheritance from the UK, it is necessary to examine not only the receipt of the asset itself but also:

• Whether it is preferable to sell it in the UK or continue holding it;
• Whether it is advisable to transfer the proceeds to Israel;
• What the cost basis is for tax purposes;
• What reporting obligations apply in each country;
• And whether there is exposure to double taxation or unplanned taxation.

Drafting a Will in the UK – The Key to Tax Savings and Avoiding Disputes

An inheritance does not always pass smoothly to the heirs. At times, complex procedural steps are required, including obtaining the appropriate order, locating documents, and dealing with banks, tax authorities, and other parties.

Preparing an orderly will is not only an expression of personal wishes, but also an important part of tax planning and intergenerational transfer planning.

A detailed and well-drafted will may:

• Reduce disputes among heirs
• Improve tax planning capability
• Enable a more efficient distribution of assets
• And help align the provisions with the law governing the inheritance

In certain cases, it is also possible to influence the question of which law will apply to the will, or to certain aspects of the estate. For that reason, early planning is highly important, and not just drafting a “standard” will.

How Can We Help?

The goal is to transfer the inheritance to heirs in Israel in the most tax-efficient manner, while addressing legal issues in both Israel and the UK, as well as banking and regulatory matters. For example: whether it is preferable to realize a particular asset in the UK or transfer it to Israel; how to transfer inherited funds to a bank account in Israel; how to use the various exemptions among the heirs; whether to make gifts during lifetime; whether to establish a trust; and more. Strategic planning, in accordance with the law and tax treaties, is essential in order to minimize tax liabilities. Nimrod Yaron & Co. has extensive experience in providing personal and professional guidance to Israelis with assets or inheritances in many countries worldwide, including the UK – from the initial planning stage, through dealings with the authorities in the UK and Israel, and up to the transfer of inherited funds to the heir’s bank account. The firm has a London office, which gives our clients a significant advantage through close support and an immediate response to every need.

Our London office is available to clients for meetings with financial institutions, currency exchange transactions, obtaining regulatory approvals, and handling all bureaucratic aspects required for the efficient management of assets and inheritances in the UK. We work in cooperation with all relevant professional parties in the UK and Israel, and provide legal solutions tailored to the circumstances of each case, both from a tax perspective and from a banking perspective.

If you have inherited an asset, or intend in the future to bequeath assets in the UK, our team of lawyers specializing in international taxation and inheritance law will be happy to advise you on this matter – contact us to schedule an initial consultation.

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