Inheritance Tax for Expats: Do UK Rules Still Apply in Dubai?

If you are a former UK tax resident relocating to Dubai, understanding how UK Inheritance Tax (IHT) applies to your estate is important.

From 6 April 2025, the UK Government introduces major reforms to the UK IHT regime, moving from a domicile-based system to a residence-based system. This shift has significant implications for UK expats living in Dubai.

Key changes to the UK IHT rules

1. Residency-based IHT system

Under the new framework, an individual’s exposure to UK IHT will depend on their residency status, rather than their domicile. This marks a fundamental change in how the UK determines IHT liability.

2. Tail provision for long-term UK residents

To prevent immediate exemption from IHT after leaving the UK, a “tail provision” applies to individuals who have been UK tax resident for 10 or more years out of the previous 20 years.

This provision extends UK IHT liability on worldwide assets for a period determined by the individual’s prior UK residency:

• 10–13 years of UK residence within the past 20 tax years: IHT liability continues for 3 years after leaving the UK.
• More than 13 years of UK residence: For each additional year of residence beyond 13 years, the tail period increases by one year.
• Maximum tail period: 10 years, applicable to individuals who have been UK resident for the full 20 years before departure.

In essence, even after leaving the UK, your worldwide assets may remain subject to UK IHT during the applicable tail period. Once this period expires, only your UK-situated assets will be subject to UK IHT.

Dubai inheritance tax

Dubai, part of the United Arab Emirates (UAE), does not impose inheritance tax. This favourable tax environment makes it an attractive destination for expats seeking tax efficiency and asset protection.

However, it is important to note that the UAE does not have a Double Tax Agreement (DTA) with the UK covering IHT. As a result, UK IHT rules take precedence when determining liability, based on an individual’s UK residency status, not their UAE residency.

Key considerations when assessing UK IHT liability

1. UK residency status

Determining whether you qualify as a Long-Term Resident (LTR) (defined as being UK tax resident for at least 10 of the previous 20 tax years) is a crucial first step in assessing your UK IHT exposure. This classification determines whether your worldwide assets remain subject to IHT during the tail period following your departure.

2. UK-situated assets

Regardless of your residency history, UK-situated assets always remain within the UK IHT net. These typically include:

• UK land and buildings
• UK bank accounts
• UK investment portfolios
• Shares or investments in UK-based companies

In addition, the UK Government has legislated that, from April 2027, unused pension funds will be included in the value of an individual’s estate for UK IHT purposes.

In light of these changes, individuals may wish to consider strategies to help reduce UK IHT exposure on unused pension funds, such as:

Transferring a UK SIPP to a Qualifying Non-UK Pension Scheme (QNUPS) – However, such transfers may involve additional tax considerations, including:

• Overseas Transfer Charge (OTC) – A 25% tax on the transferred amount, unless specific exemptions apply.
• Overseas Transfer Allowance (OTA) – The maximum amount transferable to a QROPS free of tax. For the 2025/26 tax year, this limit is £1,073,100.
• 10-year rule – HMRC retains oversight for 10 years after transfer.

Given the complexity of these measures, professional advice is strongly recommended before proceeding with any pension transfer.

Pension drawdown

Another strategy is to drawdown pension funds, for example:

• Taking the 25% tax-free lump sum from a UK pension; and
• Making regular or annual withdrawals to gradually reduce the pension value within your estate, thereby reducing the portion potentially subject to UK IHT.

While Dubai’s tax-free environment remains highly attractive for expats, UK IHT rules can continue to apply after you leave the UK, depending on your historic residency.

Understanding your exposure under the new residence-based IHT system and tail provisions is essential for effective cross-border estate planning. It is strongly recommended that you seek professional tax advice to protect your wealth and minimise potential UK IHT exposure.

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