The U.K IHT that we have covered on a number of articles on the page is a complex system, for those that are looking to understand the basics please read my article on IHT tax, gift tax, but will focus on IHT tax for expats that are married to a foreign spouse and for those that die without a will.
Firstly, I have come across a lot of clients that have a foreign spouse but have no will in place. Expats that believe they will not outlive their Spouse and want to pass on their assets in a tax-efficient manner without leaving a massive U.K IHT bill to their spouse.
Here are the nill rate bands (NRB) with and without residency and spouse for 2021
Although it suggests that your NRB of 1 million GBP for couples with residency can be passed, it does state that the partner does have to be domiciled in that country. Now I have covered domiciled in a few other articles and this can get technical so would advise expats to read that article if they are unsure.
Here is what the article stipulates in regards to a foreign spouse:
If one spouse is UK domiciled and the other is not, and the UK domiciled spouse dies first, then only assets of up to £325,000 may be left to the surviving spouse tax-free and this limit is reduced by the value of all gifts made to the non-domiciled spouse during the lifetime. Any assets above that limit will be taxed in the normal way, first using the Nil Rate Band and other allowances and then being taxed at 40%.
However, the surviving spouse has the option to make an election to be treated as UK domiciled in order to inherit a greater value of assets without suffering Inheritance Tax, but their own estate would then be brought into the UK Inheritance Tax net until the election expires after 4 years of non-residency in the UK.
UK inheritance law regarding married couples is different than in many countries. Under UK inheritance law, marriage doesn’t result in jointly-owned matrimonial or community property unless such property is specifically placed under joint ownership by the couple. As there is no ‘forced heirship’ in England and Wales, the property can freely be given away during a person’s lifetime. However, such gifts may attract UK inheritance tax or gift tax, read my article on gifts for that.
If deemed domiciled the NRB can be passed tax-free and then doubles up when your wife passed to your son at the current rate of 650,000 GBP without a residence.
Although if not deemed domicile, this means that you can’t double up your NRB and pass anything over tax efficiently. All is not lost, as you can put in your partner’s name for example if you had a U.S Spouse you could use their IHT tax rather than your U.K one.
The U.S has a $11.3 million IHT tax band that is much higher, than the U.K 325,000-500,000 GBP.
Furthermore, a lot of countries don’t impose IHT tax so it is worth looking up the laws and planning accordingly.
If your estate is worth over 325,000 thousand and you do have a foreign spouse I would urge you to speak to a specialist as they will be able to arrange your estate.
What if you don’t leave a Will?
If a British resident dies without leaving a will, intestacy law determines how their estate is distributed and what UK inheritance tax is to be paid.
It is worth noting that the laws differ in England and Wales, to Scotland.
Conclusion
If you are an expat, it is always recommended to have a will, however, if you have a spouse who is a different nationality then it is worth assessing your options.
If you don’t have a will, then the laws of intestacy will come in to play and this is where it can become messy. If you have been an expat for a period of time, you will usually be over the nil rate band of 325,000 and will be subject to IHT. If you have a spouse, you can increase the nil rate band if you are married and the spouse is willing to become a UK domicile for 4 years.
If you are above the nil rate band and you want to review your assets, estate and investments, then please contact me on the form at the bottom of the page and I will call you.
