UK Inheritance Tax for Australian Residents — The Residency Trap Explained

British expats who have settled permanently in Australia often assume their UK tax obligations ended when they left. For income tax, that is largely true. For inheritance tax (IHT), it is not. The 2025 UK tax reforms replaced the old domicile-based test with a rigid residency framework, and the result catches many long-term Australian residents by surprise.

The 10-Out-of-20-Year Rule

Under the current rules, a person is subject to UK inheritance tax on their worldwide estate — not just UK assets — if they meet the Long-Term Residence Condition. This condition is triggered when the deceased was a UK tax resident for at least 10 of the 20 tax years immediately preceding their death.

The practical effect: a British person who lived in the UK for 40 years, retired to Perth at age 65, and dies at age 72 was UK tax resident for 13 of their last 20 tax years. Their Australian house, superannuation balance, and Australian bank accounts fall within the scope of UK IHT at 40% on everything above the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band). UK pension treatment has separate rules, including the change taking effect from 6 April 2027.

The 10-Year Tail Provision

Even after the 10-out-of-20 test is no longer met, a separate rule applies. Once a person has been subject to UK IHT under the Long-Term Residence Condition, they remain within its scope for up to 10 years after permanently leaving the UK.

This creates a tail: someone who left the UK in 2020 remains within the IHT net until at least 2030, regardless of where they are tax resident during those years. If they die in Sydney in 2028, their worldwide estate is still subject to UK IHT.

The tail is what makes the new system harsher than the old domicile test for many expats. Under the old rules, acquiring an Australian domicile of choice — demonstrating a permanent intention to remain in Australia — could cut the UK IHT link relatively quickly. The residency-based system does not recognise intention at all. Only the passage of time counts.

What the 40% Tax Applies To

UK IHT at 40% is levied on the value of the estate above the nil-rate band. For someone within the scope of worldwide taxation, the estate includes:

• UK property, bank accounts, investments, and pensions
• Australian property, bank accounts, and investments
• Australian superannuation balances (which are trust-held, but HMRC treats the death benefit payout as part of the estate for IHT purposes)
• Assets in any other country

The nil-rate band is £325,000. If the deceased's estate includes a residence passed to direct descendants, the residence nil-rate band adds up to £175,000, bringing the effective threshold to £500,000. Estates valued above these thresholds pay 40% on the excess.

Double Taxation Between the UK and Australia

Australia does not levy a general inheritance or estate tax. This means the risk of actual double taxation on the same asset is lower than in many cross-border corridors. However, complications arise in two areas:

Superannuation death benefits. When a superannuation fund pays a death benefit to a non-tax dependant (such as an adult child), the fund withholds tax at 15% on the taxed element and up to 30% on any untaxed element. If the same benefit is also pulled into the UK IHT calculation as part of the worldwide estate, the family pays Australian withholding tax and UK IHT on the same money.

Capital gains tax. Australia imposes capital gains tax on the disposal of Australian real property by the deceased's estate. If the property's value is also included in the UK IHT calculation, the family bears both the Australian CGT liability and the UK IHT charge. The UK allows a foreign tax credit for overseas tax paid on the same asset, but the credit cannot exceed the UK IHT attributable to that asset — it does not eliminate the overlap entirely.

There is no comprehensive double taxation treaty between the UK and Australia that covers inheritance tax. The 2003 UK–Australia Double Taxation Convention covers income and capital gains, not estates. Families must rely on unilateral relief provisions in UK domestic law (HMRC's foreign tax credit) rather than treaty protections.

Who Needs to Worry

Two categories of people are most exposed:

Recent retirees. A British person who retired to Australia within the last 10 years almost certainly meets the 10-out-of-20 test. Their worldwide estate is fully within scope.

Long-term expats with UK pensions. Even those who have lived in Australia for 15 or 20 years may still have UK-based defined contribution pensions (SIPPs, personal pensions). From 6 April 2027, unused UK pension balances will be brought into the IHT calculation — a change that catches people who thought their pension sat outside the estate entirely.

What This Means for Families

If a British person dies in Australia and their estate is within the scope of UK IHT, the executor must lodge the appropriate UK IHT return with HMRC before applying for a UK probate reseal. The tax payment or clearance steps depend on the estate's circumstances and should be confirmed with HMRC and the Probate Registry.

This adds a layer of complexity to what is already a demanding cross-border estate process. The British Person Dies in Australia — Family Emergency Guide includes the IHT exposure worksheet that maps the residency timeline, identifies which assets fall within scope, and calculates the potential liability before the executor files with HMRC.