UK Expat Inheritance tax

UK Inheritance tax (IHT) is the tax that is paid on an estate when the owner of that estate dies. Depending on certain criteria, the tax may also be payable on gifts or trusts made during that person’s life.

Typically, UK Inheritance Tax is paid by the executor using funds from the estate of the deceased. Trustees with assets in a trust are usually responsible for the payment on IHT in that trust and sometimes people may have to pay IHT on gifts received. However, the payee of IHT is dependent on a number of factors, and each circumstance may affect who should pay the IHT owed.

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 the death of a value up to 1 million as of 2020. This is for married couples with a prime U.K residency and house. This is called the transferable nil band rate.

Inheritance tax for an expat can be something of a thorn in the side. If you are a long term expat that earns more than what you would in the UK and with less tax it means you can build up an estate and that estate can be taxed by the UK government when you pass.

All your worldwide assets are subject to inheritance tax.

What are the ways you can reduce your inheritance tax as an expat? Well, the two main ways are:

1. Non-Domicile
2. Trusts
3. Gifts

Changing Your Country of Domicile

While there is no single legal definition of your country of domicile, it will often be established according to three factors: where you were born, if you have assets in that location and where your father was born. When it comes to determining your country of domicile, the taxman will interpret the conditions and draw their own conclusion about whether you are still domiciled in the UK.

Due to IHT being such a major revenue earner for the UK government (they collect over 5.4 billion a year GBP) changing your domicile can be a difficult and stressful process – and even then your efforts may not be considered enough.

Changing your domicile tax status requires much more than simply showing that you now live abroad, you also have to be able to prove that you have no intention of returning to your original country of residence. You can attempt this in a number of ways, including:

•     Relinquishing your UK passport
•     Severing all links with social organisations and join new organisations in your country of residence
•     Purchase property in your country of residence and selling all your UK based property
•     Closing UK bank accounts
•     Many more actions

https://www.gov.uk/government/consultations/reforms-to-the-taxation-of-non-domiciles/reforms-to-the-taxation-of-non-domiciles – Details of the changes in taxation for those deemed non-domicile

However, as it is the preserve of the UK taxman when it comes to determining whether your country of domicile has changed, this is the least recommended of the two approaches. Of course, you may also then be subject to IHT in your new country of domicile. Before beginning on this path, ensure that you have spoken to an adviser to have all the facts and information.

Protecting Your Assets From IHT

Avoiding IHT can be a very complex process if you decide to proceed without any advice or assistance and therefore you should always seek advice from an independent financial adviser who will be able to talk you through each of your options.

If you believe your estate is worth more than the Nil rate band through the use of a number of tax-efficient financial structures you can not only avoid IHT but also potentially increase the final value as well.

For example, setting up trusts for life assurance pay-outs, payment of gifts (one-off or regular), and transferring your pension pot can help you avoid IHT.

If you are interested in reducing your inheritance tax as an expat and want to make sure that your family benefits from the work you have put in, please email me using the form at the bottom of the page.

The two main types of trust are

1. Discretionary trust

• These can be used if you want to retain control over your assets, but remove them from your estate for IHT purposes.
• They are often used by parents/grandparents.
• Beneficiaries and terms of discretionary trusts can be changed by the trustees.
• As with gifting, the “settlor” (the person placing the assets in trust) needs to survive seven years for those assets to move entirely out of their taxable estate.

2. Absolute or bare trust

• No tax is payable when assets go into such a trust.
• However, they are relatively inflexible as beneficiaries cannot be altered.
• For those looking to take a more drastic approach, you do have the option of declaring yourself non-domiciled or getting rid of your U.K passport and assets in the U.K.

These are often complex procedures and get in touch if looking at another citizenship as a state in my citizenship guide you have options available to you. Normally if you are not willing to neutralize some of the cheaper citizenships can be got for $150,000 or from $300,000 through property investment.

Gifts

If you are in a position to gift certain assets to family members or those who you want the asset to go to, then there are many ways to do this. There are a few rules which 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.

Where 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.

Tax advice is not offered and is separate from Beacon Global Advisor Network.

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