All those deemed to be ‘British-domiciled’ are potentially liable to IHT, so how do you know if that’s you if you’ve been an expat for a lengthy period of time? Rather frustratingly, it’s very difficult to ascertain whether or not you’ve lost your domicile, and a multitude of factors are taken into consideration by HMRC, with the goal posts seemingly ever moving. You might think that you’ve been out of the UK for so long that you’ve lost your UK domicile status, but Richard Burton also thought the same having spent the last 26 years of his life in Switzerland. He requested to be buried with a copy of Dylan Thomas’ poems as well as having the Welsh flag laid over his coffin and as such, was considered to have ‘emotional ties’ to Wales and hence therefore UK domiciled. His estate was subsequently issued an IHT bill of £2.4 million.
There are tests one can do to determine their domicile status with a legal specialist, but I always feel it’s best to err on the side of caution and assume that Brits, certainly those whose father was born in the UK, are UK domicile.
We each have a nil rate band (NRB) of £325,000 which is the amount you can leave your beneficiaries before IHT of 40% is applied to the remaining balance. We also have a residential nil rate band (RNRB) of £150,000 (increasing to £175,000 on April 6th this year) which means that if your primary residence is worth over this sum, you can leave £475,000 before any IHT is due. Those with a UK-domicile spouse or civil partner are able to transfer their entire estate to them, with IHT only due on the second demise. This means that, assuming the primary residence is worth £300,000 or over, that IHT is only due on estates worth over £950,000. Obviously, this increases to £1 million for married couples with homes over £350,000 from April this year.
If your estate far exceeds this sum, then there are a number of options available to help mitigate your overall IHT liability. One such solution is a ‘Discounted Gift Trust’.
A Discounted Gift Trust allows a UK domiciled person to ‘gift’ a plan into trust, receive an income for life or until funds have been exhausted from this gift, and, assuming they’ve been successfully medically underwritten, an immediate reduction in their IHT liability. A further reduction of the Discounted Value applies after 7 years survival from the point the gift was made. Growth within the trust is also immediately outside of ones estate for IHT purposes.
Depending on the structure of the trust will determine whether this is classed as a Chargeable Lifetime Transfer (CLT), or a Potentially Exempt Transfer (PET), [Rather a lot of acronyms in this industry!], which means that a lifetime inheritance charge may be applied if it’s the former. Clearly, this is a very complex subject, and one that needs to be discussed in depth with a qualified professional before setting anything up.
It may be the case that simply gifting assets, or using a different trust is best suited to you, and should always be based on your individual position and requirements.
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