Death duties or UK Inheritance Tax?
How well do you understand your UK Inheritance Tax position; are you liable and how can you legally plan to mitigate your liability?
Financial planning in this area, as early as possible, is important. Who would you prefer to inherit your assets, your chosen beneficiaries, or the UK tax man?
Let’s start at the beginning. Inheritance tax (IHT) is largely a discretionary tax that is paid on the value of your estate when you die. As always there is fine print. In some situations and depending on certain criteria, you may also be liable to pay tax during your lifetime.
In the year ending January 2022, HM Treasury collected £5bn ($6.7bn, €6bn) in IHT receipts – £700m more than the previous year.
This substantial rise in the treasury’s IHT income can be attributed to growth in property prices and asset price inflation pushing up the value of estates.
With good planning and the right financial advisor, you can arrange your financial affairs to be more effective and tax-efficient from an IHT perspective – who likes paying more tax than absolutely necessary. The earlier you seek advice, the better.
SEEK REGULATED FINANCIAL ADVICE
Unfortunately, IHT planning is far too often not taken into account until it is too late. Finsbury Associates lists the following IHT topics for you to consider and discuss with your financial advisor.
Ok, if you have read this far, you’re probably thinking; “I’m an expat… I live outside of the UK… so if I am a non-resident in the UK therefore, I am not liable to IHT in the UK. Right?”
Wrong. Even if you are an expat living outside of the UK, you still could be subject to IHT in the UK – if you are UK domiciled.
ESTABLISH IF YOU ARE UK RESIDENT AND YOUR DOMICILE STATUS
Where do I stand? Here is the reality.
It is essential that you understand that being classed as non-resident in the UK for tax purposes has no effect on you if you are a domicile of the UK. Domicile is not the same as residency. People who live and work abroad without paying UK taxes are still likely to be considered as domiciled but non-resident by HMRC, and therefore liable for IHT.
If you or your father were born or raised in the UK, you are likely to be deemed to have UK domicile status and with that, your worldwide estate is exposed to IHT liability.
If you are a non-UK domicile, your IHT liability only extends to your UK assets. This is a benefit, but not a gift from the HMRC that will keep on giving. After a long period of residence in the UK, your IHT position may be affected by the acquisition of “deemed domiciled” status.
Unlike non-residents, non-UK domicile citizens do not pay IHT. UK citizens who change their “country of domicile” to another country will not pay IHT in the UK.
The process of trying to achieve non-domicile status is arduous and despite your best efforts to prove that you no longer have UK domicile status, it may not be enough. When it comes to determining your country of domicile, the taxman will interpret the conditions and subjectively determine whether they deem you to be UK domiciled or not.
IHT is a considerable revenue earner for the UK government, as a consequence, your domicile status will not be freely relinquished. Liability to IHT in your new chosen country of domicile should also be considered.
MAKE A WILL
Why is having a Will important? If you don’t have a UK will you will die intestate and your assets are unlikely to be distributed in line with your wishes. It could also lead to UK Inheritance tax on the first death which in most cases can be avoided. If you are an expat and you have assets in the UAE and you don’t have a Will then your assets will be distributed as governed by Sharia Law.
Your Wills must be valid in the country where you live and where your assets are held.
MAKE A PLAN
There are legal ways to avoid a significant IHT bill in the UK, and, with careful planning, you can protect your estate by utilising tax-efficient financial vehicles and even potentially increase the final net value of your estate.
If you are a UK domicile and your worldwide estate is valued at over £325,000, the nil rate band, your estate will be subject to IHT at either 40% or 36% on any amount over this threshold.
Since 2007, the nil rate band is £650,000 for married couples and civil partners, providing the executors transfer the first spouse/partners unused inheritance tax threshold to the second partner when they die.
Typically transfers between spouses made during lifetime or upon death, are free from IHT and each individual has a £325,000 nil rate band.
However, a UK domiciled individual with a non-UK domiciled spouse has a spouse exemption of £325,000, increasing in line with the nil rate band.
A non-domicile spouse can elect to be treated as a UK domicile, an election that can be made only for IHT purposes. This election, made in writing to HMRC, can be made during your lifetime or within 2 years of death. This will be irrevocable whilst you are a UK resident and will result in IHT falling on your worldwide assets and gifts made within 7 years of demise.
A residence nil-rate band of £175,000 is also available, designed to make it easier to pass on the family home to one’s children. This additional allowance for IHT, which came into effect on 6th April 2017, can be transferred even if your spouse died before it was introduced. This is on the condition that the property will be inherited by lineal descendants such as children or grandchildren.
Here are some of the advantages gained when considering “better now than later”.
Saving the simplest for last; making gifts throughout your lifetime as a way of reducing your future IHT liability. Any gifts made to anyone (apart from a spouse) within the 7-year period prior of demise will use part of your £325,000 nil rate band. However, should you survive the 7 years, you will not be liable to pay IHT on gifts made and thereby minimise your liability.
There are other allowances available such as the annual allowance (£3,000), small gifts, marriage gifts and gifts made out of surplus income. The old saying “use it or lose it” really does apply here. These gifted sums will not attract IHT upon death. There are also making gifts out of excess income which will be immediately outside your estate.
Be mindful of recording all your gifting activity for tax purposes and understand the particulars of gifting by discussing your options with Finsbury Associates.
Finally, setting up trusts or writing your life insurance into a trust can also be used to reduce your IHT liability or form part of a plan to pay that liability when it does arise. Trusts are an effective planning tool to ensure assets can be passed to your chosen beneficiaries within a tax efficient wrapper, removing assets from your estate could reduce your IHT liability.
Careful planning can reduce exposure to IHT considerably – you are never too young to start planning.
If you are concerned about your exposure to IHT, we can discuss your options to minimise your future liability.
We offer a free initial consultation to discuss how to mitigate UK inheritance tax on your estate, your planning needs and ensure that your assets are protected from the UK taxman.