The Lowdown On UK Inheritance Tax

Those two pesky certainties in life – death and taxes – are both unpleasant topics to think about but if you want to ensure that your financial planning is watertight, you need to tackle both head on. And while there is, sadly, nothing you can do to avoid death, there are steps you can take to minimise your tax liability, in particular when in comes to inheritance tax (IHT).

If you are a British expat who has been burying your head in the sand about estate planning here is a quick lowdown on the IHT laws which will affect you. If you’d like to avoid paying more IHT than is absolutely necessary – which I assume you do! – now is the time to have a look at your situation so you can work out whether there are things you can do to mitigate the amount payable on your estate.

UK inheritance tax in brief

When a person dies their estate, comprised of property, money and possessions, is liable to IHT, otherwise known as death tax, if the assets exceed the UK nil rate band which is currently £325,000 per person. The estate may also include gifts made within the seven years previous to the death and trusts made during the deceased’s lifetime. That means that IHT is not merely a tax the extremely wealthy need to worry about. Many ordinary UK homeowners have been brought into the IHT net by rising property prices.

The current rate of UK inheritance tax

Anything over the £325,000 threshold will be subject to IHT at 40%.

To give an example, if your estate is worth £500,000, £325,000 of that is free of IHT with the remaining £175,000 taxed at 40% so IHT of £70,000 will be payable to HMRC.

The IHT rate is reduced to 36% if 10% or more of the net estate is left to charity. The nil rate band can be transferred between spouses or civil partners giving a couple a threshold of £650,000.

The main residence nil rate band

Introduced by the conservative government in 2017, this is an additional allowance which applies to individuals with direct lineal descendants (children or grandchildren) who have an estate with total assets above the £325,000 threshold and which includes a main residence. In the current 2019-2020 tax year, it has risen to £150,000 (having started at £100,000) and will go up once more next tax year to £175,000. For estates worth over £2mn, the main residence nil rate band is reduced.

Are you liable for UK inheritance tax?

If you are UK domiciled then yes, you are liable. Domicile should not be confused with residency. Even if you have lived and been tax resident in Asia for decades, you could still be domiciled in the UK. Many people do not realise this and end up paying more IHT than necessary as a result of a failure to do any estate planning.

How do I know if I am UK domiciled?

Four questions are asked by the tax office for determining domicile. These are:

Were you born in the UK?
Were your parents British?
Do you have any financial links to the UK?
Is there a chance that you will return to live in the UK?

If the answers to the above are yes then it is more than likely that you are domiciled in the UK. Unless you have cut all ties with the UK and have no intention of returning then HMRC will deem you domiciled there and your estate will be liable for IHT on all your worldwide assets, not just those in the UK. If the answer to any of these questions is no, it is worth you seeking professional advice to clarify your situation and determine your domicile. If beneficiaries of an estate claim that the deceased was non-domiciled, the onus is on them to prove it.

Is it possible to change domicile?

It is possible, but difficult, particularly if you still own UK assets. It is also a very big step to take which will have far-reaching ramifications and is not something I would advise without very careful consideration. Definitely take professional advice before going down this route.

If you do choose to change domicile the burden is on you to prove to HMRC that you have acquired a new domicile which probably means adopting a new nationality, relinquishing your UK passport, closing down UK bank accounts, selling property in the UK and severing all ties with organisations in the UK.

Other ways to mitigate IHT

If you are UK domiciled with an estate over the £325,000 threshold, you should look into how you can reduce your IHT liability. There are a number of perfectly legal ways to do this but it is a complicated area which should only be tackled with a professional. Infinity partner with specialists in this area who have a wealth of experience in dealing with the issues surrounding UK domicile and IHT.

If this is something you’d like to explore further, do get in touch at cturner@infinitysolutions.com and we can start the process to ensure that as much of your estate goes to your loved ones as possible and stays out of the hands of the taxman.