In this article, I will go over the Inheritance tax (IHT) for expats and some of the facts on IHT and look at options that you may have open if your estate or wealth does exceed the 325,000 GBP nill band rate (2020/2021).
The U.K is one of only a few countries that taxes personal on the worldwide assets where ever they reside and on estate worldwide. Unlike many other western countries, the Inheritance Tax in the U.K is still prominent.
What is Inheritance Tax?
Inheritance tax is tax on your worldwide estate assets when the owner dies.
Who pays the tax depends on the set up it can come on the Trustee, the beneficiaries or the executor.
Will I be Liable to U.K Tax Wherever I Live?
As stated earlier, yes. Unlike income and capital gains tax as a U.K citizen, this is simply mitigated. For example, you have 1000s of British expats in Dubai or the middle east that do not pay tax on income.
Unfortunately, the same can not be said for IHT tax, The only way as a U.K. citizen not to be affected by IHT (with gifts, trusts, wrappers) is by declaring yourself as ‘non-domicile’ this in its self is a complicated procedure and requires you not to have any assets or links to the U.K.
What is Subject to U.K IHT?
For anyone else that is domiciled in the U.K or anyone that does hold assets in the U.K this is deemed subject to IHT.
As of the current fiscal year 2020/2021 this stands at 325,000 GBP anything over this amount will be taxed at 40% rate.
Couples have rates for U.K citizen partners of 650,000 GBP it will transfer the estate prior to death and this will reduce the percentage of IHT on the death of the partner.
For those holding, property the value of the estate will be valued after death by an independent real estate agent. Any one with property that currently exceeds 300,000GBP should consider your options.
Residence Nil Band Rate
Residence Nil Rate Band (RNRB) was made available meaning that the first £100,000 of a residential property’s value (rising by £25,000 every year to £175,000 by 2020) is exempt from inheritance tax if the property passes to a qualifying beneficiary. Qualifying beneficiaries include children and grandchildren as well as their spouses or civil partners.
Any unused portion of the RNRB can be transferred to a surviving spouse (provided they leave their property interest to a qualifying beneficiary). This is available even if the first spouse died before 6 April 2017, as long as the surviving spouse dies after 6 April 2017.
Mitigating IHT
Other than declaring yourself non-domiciled. I have stated in articles prior, one of the best options to mitigate IHT is to gift assets in your lifetime. The U.K allows gifts of an unlimited amount under 200 GBP or yearly gifts of 2000 GBP. But this for most would not be substantially mitigated IHT so some common ways are Trusts, Life Insurance.
Life Insurance can be a legitimate way to gift through a whole of life policy but due to the legal framework that comes with a trust, would be more inclined to use this personally.
What Type of Trusts Are best?
Read my full guide on Trusts and the options as it will be subject to circumstances. And will say that Trust a strong legal contract. Although, this gives you a strong standpoint by way of the law. They are difficult to alter once made so ensure that the right trust has been built for you.
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. Read my guide to that below.
Declaring Yourself Non-Domicile
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 joining 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
However, the UK taxman comes to determine whether your country of domicile has changed, this is the less recommended of the two approaches. Of course, you may also then be subject to inheritance tax 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.
Conclusion
As stated in the article some of the best ways to reduce your IHT without taking extreme measures is to gift assets in various wrappers, such as trusts. This includes proper planning and implementation of a Will. For those who are above the Nil band rate and looking for options feel free to get in touch.
