Even if you are an expat, UK inheritance tax will be due if you are deemed domicile in the UK and if you fail to tax efficiently plan your estate before you die.
However, there are ways to legally mitigate inheritance tax.
Inheritance tax is the tax which is paid on an estate when the owner of that estate dies. Depending on certain criteria, the tax may also be payable on gifts or trusts made during that person's life.
Typically, inheritance tax is paid by the executor using funds from the estate of the deceased. Trustees with assets in a trust are usually responsible for the payment on inheritance tax in that trust and sometimes people may have to pay inheritance tax on gifts received. However, the payee of inheritance tax is dependent on a number of factors, and each circumstance may affect who should pay the inheritance tax owed.
Are British expats and non-residents liable for UK inheritance tax?
Even if you are an expat living 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.
If you are UK domicile and your estate is valued at over £325,000 your estate will be subject to inheritance tax - either 40% or 36% on the amount over the threshold. Since 2007, this threshold has increased to £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. UK spouses can pass their estate to each other tax-free but then their children would receive a bill of 40% over £650,000.
It is essential to understand that being classed as non-resident in the UK for tax purposes, as your domicile is unlikely to have changed, you will still be liable for UK inheritance tax.
The domicile is the country which a person officially has as their permanent home or has a substantial connection with. When you're born, you're automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother, although this may vary depending on each individual's circumstances.
Your domicile of origin then continues until you acquire a new domicile - even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.
Why is your domicile important?
Among many things, your domicile is important when it comes to determining your tax liabilities in three main areas: your income tax (from investment or employment), Capital Gains Tax and Inheritance Tax.
Your domicile is an important factor when determining how your individual estate should be passed on in the event of your death and is of particular importance if you were to own property or financial assets in foreign jurisdictions. The actual management of your estate will vary depending on each situation, but it's important to have an understanding whether you live abroad or have assets location abroad.
For British expats who live abroad there is also a concept of 'deemed domicile' which plays a part when calculating inheritance tax on your estate when you die. 'Deemed domicile' means that even if you are not domiciled in the UK under general law HMRC could treat you as domiciled in the UK at the time of a transfer if
- you were domiciled in the UK within the three years immediately before the transfer, or
- you were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you make a transfer.
Domicile of choice - changing your Domicile
After the age of 16, you can change your domicile. To do this you will need to satisfy a number of criteria and be able to provide evidence of each one. The criteria for changing your domicile are varied and each case will be judged on it's merit incorporating the evidence provided. The basic criteria for changing your domicile will typically include as an absolute minimum:
- Leaving the country in which you are domiciled and settle in another country
- Provide strong evidence that you intend to live in your new location permanently or indefinitely
You will be considered a resident (for tax purposes at least) if you're present in a country for 183 days or more per tax year - this is true of the UK HMRC and also other governments around the world. Additionally, if you go and work abroad for more than one year, you must not be back in the UK for more than 91 days, on average, in any 365 day period, for the duration of your time abroad.
Sometimes, if your return home is unavoidable (say for example for compassionate reasons) the HMRC may make an exception, providing you can prove that you exceeded the limits through no fault of your own.
There is a Statutory Residence Test which is a series of questions asked to determine your tax residence status in the UK.
To be 'ordinarily resident', the country has to be your ordinary home, where the definition of ordinary means that you spend the majority of your time there, every year and don't take major trips abroad.
It is common to be 'ordinarily resident' but not 'resident' and is often where someone travels overseas for a period of time (include a full tax year).
It is possible for you to be resident in more than one country at any given time and it will fully depend on how you've spent your time and what the rules are in each country - the major issue here is that if you don't manage it carefully, you may be taxed twice.
The difference between Domicile and Residency
There are considered to be two 'domicile' concepts. One is where you have your permanent home (not the same as residency, since that is where you spend your time for tax purposes). The second is your 'domicile of origin', which is where your father's permanent home was (if your parents were married when you were born and this changes to your mother, if they were not. So, you could have been born in France, but if your father/mother was English, your domicile of origin is Britain.
Domicile and residency usually go together but for certain taxation purposes (eg income tax or inheritance tax) your particular mix of residency, ordinary residency, domicile and domicile of origin will make a difference to what tax you have to pay.
If you've got a non-domicile status in the UK, only UK based assets will be liable to inheritance tax in the UK.
Mitigating UK inheritance tax as an expat
Inheritance tax is commonly defined as a tax on people who fail to plan their estate tax efficiently. With careful planning, and independent advice it is possible to legally avoid a significant amount of inheritance tax in the UK.
In a nutshell, there are two primary methods for expats to legitimately avoid UK inheritance tax and ensure you can pass on as much as your estate to your heirs as possible.
Firstly, and most difficult, is to change your country of domicile away from the UK – but this takes time.
Secondly, and this is where I can help you protect your estate from inheritance tax by moving them into tax efficient financial structures.
Changing your country of domicile
While there is no single legal definition of your country of domicile, it will often be established according to three factors: where you were born, if you have assets in that location and where your father/mother was born.
When it comes to determining your country of domicile, the tax man will interpret the conditions and draw their own conclusion about whether you are still domicile in the UK. Due to inheritance tax being such a major revenue earner for the UK government, changing your domicile can be a difficult and stressful process - and even then your efforts may not be considered enough.
Changing your domicile tax status requires much more than simply showing that you now live abroad, you also have to be able to prove that you have no intention of returning to your original country of residence. You can attempt this in a number of ways, including:
- Relinquishing your UK passport
- Severing all links with social organisations and join new organisations in your country of residence
- Purchase property in your country of residence and selling all your UK based property
- Closing UK bank accounts
However, as it is the preserve of the UK tax man when it comes to determining whether your country of domicile has changed, this is the less recommended of the two approaches. Of course, you may also then be subject to inheritance tax in your new country of domicile. Before beginning on this path, ensure that you have spoken to an adviser to have all the facts and information.
Protecting your assets from inheritance tax
Avoiding inheritance tax can be a very complex process if you decide to proceed without any advice or assistance and therefore you should always seek advice from an independent financial adviser who will be able to talk you through each of your options.
If you believe your estate is worth more than £325,000 (and considering the rise in UK and HK house prices the number of people reaching this threshold is growing by the week), through the use of a number of tax efficient financial structures you can not only avoid inheritance tax but also potentially increase the final value as well.
For example, setting up trusts for life assurance pay-outs, payment of gifts (one off or regular) and transferring your pension pot can help you avoid inheritance tax.
If you are concerned about potential inheritance tax, or would like clarification on how to legally avoid UK inheritance tax, please feel free to contact me.
I can help provide you:-
- An assessment of your current domicile and residence situation
- The amount of inheritance tax you and your family could be exposed to
- Options and recommendations how manage your assets to mitigate inheritance tax on your estate
Your initial consultation is free and will enable you to find out how you could avoid any potential inheritance tax on your assets.
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