Inheritance Tax Planning & Inheritance Tax Mitigation for Expats / Non UK Residents
As Benjamin Franklin said, death and taxes are life’s only two certainties. Unfortunately, with inheritance tax, it’s possible for the two to occur simultaneously. To understand more about what you can do, today, to reduce the inheritance tax that your family will pay on your estate, contact us today for a fee-free initial meeting with one of our Chartered Financial Planners.
How does inheritance tax work in the UK?
The main feature is that a tax of 40% is applied on the full value of all estates valued at more than £325,000.
The threshold at which inheritance tax (IHT) becomes applicable in the UK is £325,000 for an individual. For a married couple, the threshold is essentially £650,000, given there is a facility to transfer your unused allowance to your living spouse. The allowance for couples rises to £1 million if the estate includes the principal residence.
If you die with assets valued in excess of the applicable thresholds, then your entire estate, above the threshold, is then taxed at 40%, potentially massively reducing what might be left to relatives, friends or charitable causes. The only exception here is a ‘family home allowance’ of £175,000 to reduce the liability for people who want to leave their residential property to their children.
Will my estate be subject to IHT?
This is probably much more likely to happen than you might think
Some people think IHT is only paid by the rich, but a quick glance at today’s average property values will be enough to suggest otherwise. Expatriates are also frequently mistaken in incorrectly believing that they do not need to worry about UK inheritance tax.
The main reason as to why IHT is so often relevant for expats is that there is a significant difference between being resident in the UK and being ‘domiciled’ in the UK. You may not be a UK resident if you never spend more than 183 days in the country in any one tax year. However, without you realising this, the authorities might consider you to be domiciled in the UK. This might be the case even if you do not consider yourself to be British.
Anyone considered to be UK domiciled is potentially liable for UK taxes.
What is domicile?
Your domicile might have been determined when you were born
Domicile is not the same as citizenship, with the main difference being that you can only ever be domiciled in one country at a time. You first acquire a domicile at birth – you normally assume your father’s country of domicile, or your mother’s if your parents were not married.
However, there are ways that adults can apply to legally change a domicile. You can only change your domicile if you have a definite intention to live in the country in question indefinitely. Even if you had definite plans to leave the UK and live permanently in another country, there are additional steps to be taken to satisfy the UK authorities, who will only accept you relinquishing your UK domiciled status if you can demonstrate that you will not be coming back. As evidence of this, they might want you to relinquish your UK passport and/or sell all your UK properties and/or close all your UK bank accounts.
This means that you could be UK domiciled if any one of the following is true:
- You were born in the UK
- Either or both of your parents were born in the UK
- You were brought up in the UK
Even if none of these is the case, you could still fall foul of something known as being ‘deemed domiciled’ for tax purposes. HM Revenue & Customs say someone is deemed domiciled if they have resided in the UK for 15 of the previous 20 years, so if you have recently left the UK, this could apply to you. There could be implications here for the estates of people who leave the UK on their retirement, and who then die within a few years.
If HMRC believes you are domiciled or deemed domiciled in the UK, then it also believes you are liable for UK taxes.
Changing your domicile from the UK might not solve these issues either unfortunately. Your estate would still be subject to UK inheritance tax if your death occurred within three years of the change of domicile.
In summary, a very large number of UK expatriates will, one way or another, be liable for UK inheritance tax.
How much of my estate is likely to be subject to inheritance tax?
Probably the entire estate
For UK domiciled individuals, IHT will be levied on your entire estate, even where the assets are located overseas. The same thresholds will apply as those for UK residents, i.e. the £325,000 for a single person and £650,000 for a married couple, as explained above. I
If you are not domiciled or deemed domiciled in the UK, you could still have a liability to UK IHT, but only on any UK-based assets in these circumstances.
What can I do about my potential UK IHT liability?
Seek advice from a specialist adviser
This is a very complex area, but help is at hand if you engage an adviser who specialises in estate planning. There are some simple ways you can mitigate your IHT liability, including:
- Formulating a strategy to best utilise your assets and pensions to minimise future IHT due on your estate. Decisions made concerning pension assets are key in any IHT mitigation strategy due to pensions being free from any IHT liability. We have considerable experience of cutting our client’s future IHT liabilities simply by formulating strategies concerning their accumulated pension rights.
- Making gifts to relatives, friends, charities etc. during your lifetime. If you do it this way, IHT will only apply were you to pass away within the seven-year period following the gift. The full 40% tax rate will only apply if you die within three years of the transfer. If you die in the fourth year it will be 32%, then 24% in the fifth year, 16% in the sixth and 8% in the seventh
- Taking out appropriate life insurance policies. By taking out a life insurance policy with a seven-year term when you make a gift, you can ensure that your loved ones receive a life insurance pay-out to cover the IHT liability were you to die before the seven-year period has elapsed
- Making changes to your will
- Setting up trusts, such as discretionary trusts, absolute trusts and bare trusts
If you would like to understand how you can be best placed to minimise the future inheritance tax payable on your estate, contact us today for a free initial meeting. We are UK qualified Chartered Financial Planners, specialists in the area of estate planning and IHT mitigation.