Are you a British expat owning property in the UK?
Are you letting out property in the UK?
Do you own assets in the UK?
Do you have a bank account in the UK or other links to the UK?
If you fall into any of these categories, you could be liable for UK Inheritance Tax.
Beware the UK Inheritance Tax Trap
Most expats believe that because they are out of the UK, they’re exempt from all UK taxes. This is NOT the case, the main trap being UK Inheritance Tax (IHT).
Inheritance Tax is a tax that is paid on the worldwide estate (property, money and possessions) when the owner of the estate dies. Most British expats will still be liable to pay UK IHT.
You are Probably Still classed as UK Domicile
The UK differentiates between domicile and residency.
Even if you’re an expat and you live outside of the UK, you will still be subject to inheritance tax in the UK if you are deemed to be of a UK domicile status.
Just because you are resident outside the UK, does not exempt you from being liable for UK IHT. The concept of domicile is based on either where you were born, or where your father was born. It is extremely difficult to change your domicile without severing ties with the UK – even going as far as cancelling library cards, closing bank accounts and even committing to not being buried in the UK. Ultimately HMRC will decide and will draw their own conclusion about your domicile.
There’s normally no Inheritance Tax to pay if:
- the value of your estate is below the £325,000 threshold
- this threshold increases to £650,000 for married couples and civil partners if the executors transfer the first spouse’s unused inheritance tax threshold to the second partner upon death. So, upon the death of the second spouse, IHT is levied after £650,000
Residence Nil Rate Band (RNRB)
From 6 April 2017 a 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.
Inheritance Tax rates
The standard Inheritance Tax rate in the UK is 40% and it’s only charged on the part of your estate that’s above the threshold.
For example, your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Protecting Your Assets from IHT
In the past, IHT planning used to be an activity confined to the very rich. However, growing affluence and the recent rise in house prices over the last decade means that this is no longer the case. Even families and individuals with a relatively moderate level of wealth now need to plan ahead to ensure that their assets are passed on to their loved ones as tax-efficiently as possible.
The IHT planning process can be complex and one in which mistakes can be made. For this reason, it is important to seek professional financial advice before you make a start.
Forth Capital specialises in expat financial advice, pensions and investments – to speak to one of our advisers click here or call 00 41 22 311 1441.