Tax Aspects of Inheritance in the United Kingdom

If you own assets in the UK (England, Scotland, or Northern Ireland) or are expected to inherit assets in the UK, it is important to understand the legal and tax implications involved in the inheritance process. This is because even non-residents may be required to pay tax according to local law. Our London branch assists many Israelis in realizing inheritances from England. 

As of April 6, 2025, significant changes have come into effect in the UK inheritance tax system. These changes are intended to limit existing reliefs and establish a new policy regarding the taxation of inheritances in the UK.

Due to the high tax rates, which can reach up to 40% of the estate, inheritance tax has become a central consideration for anyone planning their financial future in the UK.

The UK has complex rules for the taxation of inheritances, with significant implications for heirs of assets. Early understanding of UK law and early planning of wills, residency, and gifts during lifetime can significantly reduce exposure to tax payments when transferring assets between generations.

Beyond that, inheritance tax planning can prevent legal disputes, delays in the inheritance process, and unexpected demands from various authorities.

What’s the Difference Between Inheritance Tax and Estate Tax?

• Estate Tax – Imposed on the deceased’s assets before they are transferred to the heirs (In other words, it applies to the estate of the deceased).
• Inheritance Tax – Applies to all assets received by the heir (In other words, it applies to the heirs)

Despite the distinction, in practice, the UK imposes an estate tax (technically called “Inheritance Tax”), as it is levied on the entire estate and not on the heirs, but its name remains Inheritance Tax.

Inheritance Tax in the UK – What You Need to Know

UK Inheritance Tax (IHT) is imposed on the estates of individuals after their death and involves a complex system of tax rates, exemptions, and reliefs. Its application is influenced by significant factors such as residence, domicile, and international double tax treaties. Inheritance tax is imposed on the estate at the time of the testator’s death and also on certain transfers of assets made by the testator during their lifetime.

When Does Inheritance Tax Not Apply?

According to UK law, there are several exemptions and reliefs in the context of inheritance taxation. Some apply to transfers made by the testator during their lifetime, some to estate assets at the time of death, and others to both situations. For example, transfers between spouses are exempt from inheritance tax, and transfers of business property and agricultural property may be fully or partially exempt, depending on the circumstances. Gifts made more than seven years before the testator’s death are usually exempt from inheritance tax.

In addition, under the inheritance tax rules, no tax is payable on the first £325,000 of the testator’s taxable assets. Above this amount, the following rates apply:

• 40% on assets transferred at death.
• 36% of at least 10% of the estate is left to charity.
• 20% on transfers of assets made during the testator’s lifetime.

If part of the testator’s estate is left to a direct descendant, an additional relief of £175,000 is available until 2026, and will be updated thereafter according to the consumer price index.

It should also be noted that inheritance tax does not apply to “excluded assets” such as foreign currency accounts with a bank or the Post Office or post offices, overseas pensions, holdings in authorized unit trusts and open-ended investment companies.

Domicile Test

In the past, the testator’s domicile played a significant role in determining the scope of inheritance tax. Thus, if the testator was domiciled in the UK, inheritance tax applied to their worldwide assets, regardless of whether the assets were located in the UK or not. If the testator was not domiciled in the UK, inheritance tax applied only to their UK assets.

For inheritance tax purposes, the term “domicile” includes considerations of residence based on tax years. The testator will be considered a UK resident if:

• At the relevant time, the testator was a UK resident for the relevant tax year, and was a UK resident in at least one of the two tax years preceding the relevant tax year;
• The testator was a UK resident for at least 15 out of the last 20 relevant tax years.

Therefore, for estates of testators who died up to April 5, 2025, inheritance tax applies if their permanent home (domicile) was in the UK.

What Changed as of April 6, 2025?

From this date, UK inheritance tax will continue to apply to the testator’s assets located in the UK, regardless of the testator’s residence or domicile status. However, for assets located outside the UK, inheritance tax will only apply if the testator is considered a “long-term UK resident” – a new term that includes residency considerations beyond ordinary physical presence. In other words, it is not just about residence, but additional criteria must be met to fall under the new definition.

A testator will be considered a long-term UK resident if they were a UK resident for at least 10 out of the last 20 tax years. However, a testator will remain subject to inheritance tax even after leaving the UK, depending on their previous period of residence in the UK:

• If they lived in the UK for 10 to 13 years, they would cease to be long-term UK residents 3 years after leaving.
• If they lived in the UK for 14 years, they would cease to be long-term UK residents 4 years after leaving.
• If they lived in the UK for 15 years, they would cease to be long-term UK residents 5 years after leaving.

If the testator returns to the UK after 10 consecutive years of non-residence, the residency count for inheritance tax (10 out of 20 tax years) resets.

Gift Tax

Gift tax is an important part of planning for the transfer of assets between generations. Often, when property owners are exposed to the high inheritance tax, the option of transferring assets as gifts during the testator’s lifetime arises, thinking this is preferable to bequeathing in the future. However, it should be taken into account that gifts may be subject to tax at the same or even higher rates as inheritance tax.

In the UK, the concept of gift tax is linked to the inheritance tax system (IHT). There is no separate gift tax; instead, gifts are considered part of the inheritance. Inheritance tax is generally imposed on the estates of individuals after their death, but it also applies to certain chargeable transfers made by individuals during their lifetime, including gifts.

The inheritance tax implications for gifts depend on the timing of the gift relative to the donor’s death. Direct gifts made more than seven years before the donor’s death are generally exempt from inheritance tax. However, if the donor dies within seven years of making the gift, the gift may be subject to inheritance tax, with taper relief potentially reducing the tax liability if at least three years have passed.

Therefore, early planning for inheritance tax and gift tax is essential when transferring assets between generations. Proper planning allows you to maximize existing exemptions, significantly reduce tax liability, and ensure that assets are transferred to the next generation in an orderly and efficient manner.

Inheritance Taxation in Israel Compared to the UK

In Israel, unlike the UK, there is no estate tax or inheritance tax. However, in certain cases, tax may be imposed on the full value of the inheritance received, such as capital gains tax when selling the asset.

The tax treaty between Israel and the UK includes provisions that can prevent double taxation, but it is important to plan the reporting and filing accurately to avoid double payment.

To read the Israel-UK Tax Treaty in English on the Ministry of Finance website, click here.

Making a Will in the UK – The Key to Tax Savings and Dispute Prevention

Inheritance does not always transfer smoothly to heirs. Sometimes complex procedural steps are needed to obtain a probate order or permission to realize the assets.

Creating an organized will is not just a matter of personal desire; it is an integral part of estate taxation. A detailed will can ensure that assets are transferred smoothly and efficiently to the heirs. The will should include the wishes of the deceased but must also be adapted to the requirements of the law so that its validity is not compromised.

When drafting a will, it is often possible to choose the law that will apply to it. This choice can have a substantial impact on inheritance planning and its future realization.

Without advance planning, i.e., inheritance without a will, the law that will apply to the deceased’s assets will be the law of the deceased’s last and principal place of residence. For example, if the last place of residence was in the UK, UK law will apply to the inheritance in Israel.

In the UK, unlike the inheritance laws of some other countries, there is no “forced heirship,” so the testator has the right to choose to whom to leave their assets – but to do so, a valid will must be made that clearly and legally explains how the assets should be distributed.

If you own assets in the UK, our recommendation is to make a will to ensure that the transfer of assets is done as smoothly as possible. A will can prevent misunderstandings or lengthy legal processes and ensure that the process proceeds in an orderly manner even after the death of the deceased.