As prospective expats embark upon a challenging new career or the new and exciting life they’ll be providing for their families in the immediate future, one of the last things they will be thinking of is what will happen to their legacy.
However, UK inheritance tax can be a complex area, especially for expats, so we’d advise you to learn about the key aspects of inheritance tax laws for expats and call upon expert advice when determining the best course of action for managing your wealth and estate. Failing to do this may adversely affect your beneficiaries.
What many expats do not immediately realise is that their estate will almost certainly be assessable for inheritance tax in the UK. For most financial law regarding British expats, it is important to understand the difference between residency and domicile for inheritance tax purposes.
HMRC makes it clear that it is highly likely that an estate will be assessable in the UK even if the deceased was domiciled in common law in a territory outside the UK.
UK domicile can arise in two ways. The first is under the three-year rule, which applies when a person has been domiciled in the UK on or after 10 December 1974 and within a period of three calendar years before the relevant event. The second rule, the 17 out of 20 years rule, applies when an individual has been resident for income tax purposes in the UK on or after 10 December 1974 for not less than 17 years out of the 20 years of assessment ending with the one in which the relevant event falls.
These rules usually apply both for transfers on death and lifetime transfers that are taxable when made. The only exceptions are for transfers on death where the deceased’s domicile was Italy, France, India or Pakistan. These exceptions refer to double taxation conventions negotiated before 1975. More recent conventions are not covered.
It is clear, then, that although it may be relatively simple to become a UK non-resident, losing UK domiciled status for tax purposes is extremely rare. Any ties with the UK, tenuous though they may be, may lead HMRC to argue that the individual is UK-domiciled for tax purposes on death.
Consequently, for the majority of British expats, if their estate exceeds the inheritance tax threshold of £325,000 (to 5th April 2018) it will be assessable by the UK authorities. Above that threshold, a standard 40% deduction will be applied. This level of taxation, where no tax planning is in place, may result in a property being sold to meet the tax bill. Since property may well represent a substantial proportion of the estate, planning ahead is essential to ensure that your children aren’t inheriting a large tax bill before they can access your estate.
Probate on your estate will not be granted until payment of tax, and only then will the estate be released. This payment will be made by the appointed executor.
Family legacies are treated differently. If the deceased bequeaths everything to a partner, no tax is levied, and gifts to children and grandchildren are subject to a £425k threshold.
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In the absence of a will, friends or family will have to apply to be an administrator, and so planning ahead before any move abroad is advisable. You can also do this while abroad if you prefer, but most financial advisers would recommend that a will be prepared and a plan put in place for managing your estate as soon as you either
a) have an estate of significant value or
b) have dependants who rely on your income and wealth.
It is possible to reduce tax liability on death by making gifts in advance, but it is important to be aware of the law surrounding these gifts and how it will influence the inheritance tax bill upon death. For example, should death occur within three to seven years of a significant gift, the sum will be eligible for tapered relief and tax will be paid at a reduced rate; this will likely determine how beneficial it is to provide the gift in advance.
Smaller gifts up to a total of £3,000 per annum are tax-exempt. Other gifts such as a wedding gift to children of up to £5,000 and £2,500 to grandchildren (or £1,000 to anyone else) are also exempt according to current HMRC taxation laws.
Beneficiaries should also consider what taxation will apply to revenue from assets, that is rent or dividends. Capital gains tax will also be an issue if assets are sold on, and assets held in foreign currencies will also merit attention.
Charity gifts may reduce liability on the total estate, and business relief allows some assets to be passed on free or with a reduced bill.
One interesting caveat that expats may not be aware of is the fact that farmland and woodland in the UK may attract additional relief. Therefore, it is well worth considering the make-up of your estate to determine where tax relief may be available; opportunities to pass on your legacy without additional costs may be possible.
The above covers only some of the key points in this complex area. Our advisers are all expats themselves who may be able to offer other solutions to reduce liability based upon individual circumstances. As such, expats should seek advice at the earliest possible point to ensure they are aware of significant opportunities to increase the wealth retained by you and your beneficiaries.
Frequently Asked Questions
What happens if there is no will?
If there is no will, friends and family will have to apply to be your administrator so it is best to get one sorted before you move. Here are the steps to take:
- Complete a probate application form
- Complete an inheritance tax form
- Send in your application
- Swear an oath
What about double-taxation treaties?
The UK has a number of international agreements. The Republic of Ireland, Sweden, the Netherlands, the USA, South Africa and Switzerland all have current agreements with the HMRC.
When taxation is imposed in both countries, UK law states that if the other country’s tax exceeds your UK inheritance tax liability, HMRC will limit your tax liability in the UK.
I’ve been told UK inheritance tax is payable on some gifts; is this true?
Only if you give away more than £325,000 and die within seven years.
‘Tapered relief’ means that if you do give a gift within those seven years, it will attract a reduced rate of taxation.
Small gifts are exempt no matter how large the overall estate, up to a total of £3k per annum or £250 per person in any tax year.
A wedding gift to your children of up to £5k will be tax-free, while this amount stands at £2.5k for a grandchild or £1k for anyone else.
Are there any other tax considerations for people inheriting my estate?
Where revenue is generated from assets (for example from dividends or rent).
Capital gains tax is applicable if beneficiaries decide to resell the assets.
It is important to obtain advice on where the tax liability lies when dealing with assets held in foreign currencies.
Are there any possible exemptions?
Expats pay a reduced tax rate of 36% if they leave more than 10% of their net worth to charity.
Business relief allows some assets to be passed on tax-free or with a reduced tax bill.
If your estate includes farmland or woodland in the UK, additional relief may be available.