In this article, I am going to write about Inheritance Tax (IHT) tax for U.K expats. The U.K is one of the countries that enforce IHT tax and furthermore include this on your worldwide assets.
This means for British expats having a house in Spain, or your money in an offshore bank does not mitigate your IHT. I will cover what is IHT and ways to reduce your IHT from an expat perspective.
Inheritance Tax (IHT) Explained
IHT is the tax on your estate, when someone has died. This includes property, money and possessions.
When Does U.K IHT Tax Get Triggered?
It only gets triggered presently (2020), if your estate is valued at more than 325,000 GBP. Anything, over this amount, is taxed at a rate of 40%, so for example, 425,000 GBP would be subject to 40,000 GBP taxable income. But you have ways to increase this rate.
Transferable Nill Band Rate (NRB)
The nil rate band (NRB) is fixed at 325,000 GBP, although what should be noted is that your NRB can be transferred to your partner. For expats living abroad, it must be noted that your partner should be a U.K citizen. If you do have a U.K. partner, the estate can be passed on death to 650,000 GBP. This is called the transferable nil band rate.
Residency Nil Band Rate (NRB)
What might not be so applicable for expats, is the residency nil band rate.
This is added on to the transferable rate and nil band rate. The stipulations are that you pass on your place of residence (if in the U.K) on to your children, grandchildren this includes foster children and adopted children.
As of 2020/2021, this is 175,000 GBP so this means that if you are passing on your prime residence to your children your estate can be worth, 500,000 GBP.
This will likely rise with CPI that for the sake on inflation is around 2%.
One of the questions that I have been asked is how is the estate valued, having gone through this personally will say how it went.
Any Assets Are Valued on Death
Investments and cash are pretty straight forward. However, for property, you will need to get an estate agent’s valuation (best to get a number for a medium valuation), for a guide price of the house. This needs to happen even if you aren’t selling because they will need to know the value of the estate.
Also, a valuation will be calculated on the items such as cars, jewelry and other personal possessions and this will be added up minus any liabilities (mortgages, credit card debt, and funeral expenses) outstanding debt.
The 7-year rule
Gifts, also are included if they are gifted outside of 7 years,
We will touch on this later on how to reduce IHT and if it exceeds the 7 years it is tax-exempt. Potentially exempt transfer (PET).
The present rates, if you die within this time frame are
Die within Tax paid
- 6-7 Years 8%
- 5-6 Years 16%
- 4-5 Years 24%
- 3-4 Years 32%
- 3 years or less 40%
One of the parts to consider is that houses if continued to live (HMRC defines it as benefiting from the gift) if gifted before the 7-year time frame would still be subject to tax.
Who Pays Inheritance Tax?
The executor of the Will will pay. If there is no Will the administrator of the estate. You have one year on the point of death to send in an account of the estate.
How is Inheritance Tax Paid?
These are normally paid from money within the estate, or sale of assets within the estate.
Direct payment is normally how it’s paid. This is where the executor will take it out of the holder’s credit card to pay off the IHT.
Life Insurance and IHT?
If you have a term or whole of life policy this will usually, payout on death. This is subject to IHT. Although, this can be mitigated through a way of a trust or offshore trusts for expats. Read more on my articles on Trusts for information about that.
Life insurance can also, be used to help pay off the IHT bill, without the sale of the house or estate that has to be paid prior to probate (although with property HMRC will accept installed payments).
Types of Life Insurance For IHT
You have two types of life insurance Term and Whole of Life. One of the best ways to think of these is one pays out when death happens (whole) and one if death applies (term).
The whole of life you can have as an Investment option and have it linked to the investments (unit-linked) and I have covered on life insurance blog. While Term Life Insurance covers you for a set amount each month and will pay a set amount if you die (within the reasons written in the policy) a set amount
Whole of Life Insurance
This type of policy lasts as long as you live, and generally only pays out when you die, provided you keep up with the premiums.
If you want this kind of insurance, bear in mind you might be paying premiums well into your 80’s and 90’s. Premiums are more expensive the older you get however some whole-of-life plans charge fixed premiums for a fixed amount of cover so you know how much the policy costs and the sum assured at the outset.
Term Insurance
If you gift assets away to loved ones other than spouses, there’s a risk that if you were to die within 7 years they could be left with a large tax bill. This bill will often fall on the person who received the gift rather than the estate.
An Inter Vivos policy which is a type of decreasing term insurance policy can provide a lump sum pay-out on death to match any IHT liability on a potentially exempt transfer over the nil rate band for Inheritance Tax.
This type of policy lasts a certain amount of time and only pays out if you die within the stated period. After that period your policy will expire.
Premiums are usually fixed at the start of the policy
When is IHT tax due?
IHT tax is due at the end of the sixth month. If not paid within this time frame interest will be charged.
On tax on any property, it can be paid within a 10-year time frame through periodic instalments. Although, the outstanding interest of this will be subject to tax.
If the property is sold while interest is still be paid the IHT bill will be paid when sold.
If the estate will incur IHT, selling off any assets to pay some of the IHT tax within the first 6 months it will help reduce the interest that may occur on the estate.
Gifts
As of 2020 charitable donations are exempt from IHT and if in your Will they are not subject to tax. We at IFE have spoken a lot about, gifts within your lifetime are some of the best ways to reduce IHT if you can gift it.
- 3000 GBP annual allowance to gift away
- 250 GBP unlimited gifts away to an unlimited number of people
What Else is Exempt From Tax?
Business. Depending on how you own the business and what type of business it is, you can get either 50% or 100% tax relief on some of an estate’s business assets. These could have been passed on while the owner was alive or as part of the will, but must have been owned for at least two years before they died.
Agricultural property. You can pass on a farm free from Inheritance Tax, as long as it meets certain conditions. But certain farm assets aren’t exempt from tax, such as farm machinery.
Woodland Property. You can get relief for growing timber, but it only applies to the timber, not on the land itself. It is applied on death and defers the tax due until the timber has been sold. However, woodlands used for commercial purposes could get up to 100% business relief, which is preferable to deferment. In theory, Inheritance Tax can be postponed until the trees are cut and sold, provided the woodland has been owned for five years.
Other Ways to Reduce IHT?
Yes, for expats you have the option of offshore trusts, please read my full guide on offshore trust. But, the best way is to gift within your lifetime the estate. Other, options from an investment standpoint are to invest in AIM shares. These are a smaller U.K index with around 720 companies listed, you have designated funds that are designed for this purely for the purpose of IHT planning.
Non-domicile
One way to get rid of IHT is to declare yourself non-domicile this means getting rid of everything (and I mean everything) in the U.K, no bank account, no car, not even a gravestone (one famous case) and going through the government procedure of declaring non-dom this will mean cutting all ties and assets from the U.K.
Giving up your citizenship is one way that is becoming popular for those that want to cut all ties with the U.K and have a vast amount of wealth. Getting rid of your U.K passport and buying another one, these can range from the Caribbean passports that start from around to 150,000 GBP to Maltese for 500,000 GBP for more information on this feel free to get in touch or read my blog on second citizenships.
Any Other Taxes?
It depends on the beneficiaries, they can be subject to income tax if over the current income tax level at the usual level if over 12,500 GBP.
Capital Gains Tax, on the sale of any assets that go over the current CGT tax.
And Dividend tax if over the current tax rate on dividend payout.
If you are unsure on this or have an estate of over 325,000 GBP and a British expat feel free to get in touch and be happy to go over the options. You can email me at info@investmentsforexpats.com
