Whether you’ve recently moved outside the U.K. or been outside for a few years or several decades, if you hold British citizenship, it’s essential to address the issue of UK Inheritance Tax (IHT) sooner rather than later.
While there’s no need for undue concern, assuming that living abroad for an extended period exempts you from HMRC’s reach upon your demise can be a costly mistake. Many British expatriates make this error, and it can lead to substantial financial consequences.
To illustrate the potential risks, consider the case of the legendary actor Richard Burton, who resided in Switzerland for 27 years to evade UK tax liabilities. Surprisingly, simply purchasing a burial plot in Wales, even though he wasn’t ultimately interred there, created a sufficient connection to the UK, subjecting his estate to a hefty £2.4 million IHT bill. A painful lesson indeed.
While you may not possess Burton’s wealth, owning property or maintaining significant funds in UK bank accounts can push you over the IHT threshold in the UK.
In this comprehensive guide, we will delve into the intricacies of IHT regulations and explore strategies to mitigate potential substantial tax liabilities.
Table of Contents:
- Differentiating Between UK Residency and UK Domicile
- Procedures for Changing Domicile
- UK Inheritance Tax Rates
- Transfers between Spouses of Different Nationalities
- Assessing Assets Subject to Inheritance Tax
- Methods to Reduce Potential IHT Liabilities
- The Advantages of Having a Will
- Seeking Assistance with Inheritance Tax Planning
Differentiating Between UK Residency and UK Domicile
In assessing your inheritance tax liability, it is crucial to grasp the distinction between residency and domicile.
Residency pertains to your primary place of physical residence. If you spend the majority of your time in one location and reside there for at least 183 days annually, you are (normally) considered a resident.
Conversely, domicile is established at birth, often based on your father’s place of birth, and it typically remains constant throughout your life.
Procedures for Changing Domicile
While it is technically possible to acquire a domicile of choice, this process is usually protracted and bureaucratic, involving significant consequences. Therefore, it should not be taken lightly.
Even with official confirmation of a new domicile of choice, several factors are considered that could still lead HMRC to deem you UK domiciled after your passing, leaving you unable to contest the decision. These factors may include maintaining UK bank accounts, owning property or other assets in the UK, strong family ties, frequent visits, and more.
If HMRC classifies you as UK-domiciled posthumously, you may face an assessment of inheritance tax on your estate.
Inheritance Tax Rates in the UK
In the United Kingdom, inheritance tax is assessed at a rate of 40% above specific thresholds:
There is a Nil Rate Band (NRB) of £325,000 that applies to all estates within the UK. If the total value of your assets falls below this threshold, you are exempt from paying any inheritance tax. So, if your assets are valued at less than £325,000, there is no need to be concerned about inheritance tax.
The NRB can be transferred between spouses who are both UK-domiciled. If it remains unused upon the first UK-domiciled spouse’s passing, it can be transferred to the surviving spouse. This allows the second spouse to inherit assets worth up to £650,000 without incurring inheritance tax. Individuals considered UK-domiciled with assets exceeding the relevant thresholds should carefully assess their situation.
Transfers Between Spouses of Different Nationalities
This is a critical consideration for UK nationals who are married to individuals from other countries.
Assets can be transferred between two UK spouses without incurring any inheritance tax. However, if you are UK-domiciled while your spouse is not, you can transfer a maximum of £650,000 to them without triggering inheritance tax. Any assets exceeding this amount will be subject to inheritance tax.
If you possess a substantial estate and have a spouse of a different nationality, it is strongly advisable to seek guidance from a qualified professional.
Assets Subject to Inheritance Tax
It’s crucial to understand that inheritance tax is applicable to all assets owned globally, not limited to those situated in the UK. This encompasses assets such as properties, bank accounts, and investments, whether they are held in Thailand or any other location.
Some assets, including certain pensions such as SIPPs, QROPS, and QNUPS, as well as specific investments, are exempt from inheritance tax. However, seeking guidance from a qualified financial adviser is highly recommended to ensure a clear understanding of these exemptions.
Strategies for Reducing Potential Inheritance Tax Liabilities
There exist various approaches to address the potential burden of a substantial inheritance tax liability, including:
- Utilizing your assets (although this may not align with your heirs’ wishes).
- Making asset gifts (while bearing in mind applicable gift rules).
- Establishing a Qualifying Non-UK Pension Scheme (QNUPS).
- Acquiring specially designed life insurance products and creating specific trust arrangements to benefit your children, partner, or spouse.
Gifts
If you are in a position to gift certain assets to family members or those to whom you want the asset to go, then there are many ways to do this. There are a few rules that surround the gifting process though. It’s not as simple as changing the name.
The 7-year rule. If you gift something – you must live for the next 7 years for it to be cleared of inheritance tax. This is so that people don’t gift everything just before they pass away.
Any gifts (not given to a spouse) worth less than £325,000 (the nil rate band) are added back to your estate to give an adjusted net worth, while a gift of more than £325,000 wipes out the nil rate band and the excess is taxed.
When it comes to property, if you have property or wealth in the place of residency it would be worth seeing a tax advisor. You can see if any specific gains are subject to local gains tax on the gift.
Another point to remember is the seven-year taper for IHT on gifts or lifetime transfers does not apply to the residence nil-rate band.
| Time between the date of gift and date of donor’s death | The effective rate charged on gift |
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| More than 7 years | 0% |
You can gift up to £3,000 per family member tax-free each year.
Two commonly employed trust structures for this purpose are discounted gift trusts and excluded property trusts. Additionally, pension contributions with particular structures can serve as a valuable solution, but it is imperative to consult with a professional possessing the relevant expertise to make informed decisions.
QNUPs
A complete guide to QNUPS We have done a guide on QNUPs and how this can potentially mitigate liability to IHT tax this is a popular option for many U.K. expats (especially with foreign spouses) to look at to potentially mitigate IHT tax.
https://investmentsforexpats.com/qnups-ultimate-guide/
Trust- This can be quite a broad topic and most trusts will be subject to 7 year rule that is explained above however, for a guide on general information on trust I have written the following-
https://investmentsforexpats.com/offshore-trusts-expat-edition/
The Benefit of a Will
However large or small your estate, a will is essential to make sure your wishes are adhered to after your death. All estates over a certain amount are subject to the probate process, which can be a lengthy one.
Life insurance can be a useful tool to ring-fence money outside of an estate in order to provide funds to cover the probate process and everyday living expenses for your family while they wait for probate to be completed.
Getting Help with IHT Planning
IHT is a complicated issue and, in this case, I would strongly advise that you take professional advice to fully understand your situation and the options open to you to lower your liability.
https://investmentsforexpats.com/uk-expat-inheritance-tax-iht/
Useful links for reading:
https://investmentsforexpats.com/capital-gains-tax-for-uk-expats-on-uk-property/
If you have any questions, please email me and I can advise or point you in the direction of someone who will be able to answer your questions.
