Having been in Hong Kong for over 25 years, there have been some significant changes and some of these are motivating people either to go home or to new pastures in the United Kingdom.
There are many benefits to the UK, including culture, education, health care, natural beauty, and its history. One big downside compared to Hong Kong, however, is its complex tax system.
One tax to be aware of is Inheritance Tax – IHT.
What is Inheritance Tax?
Inheritance tax (IHT) is calculated and payable on your estate upon death. Your estate includes everything you have of value, such as your home, jewellery, savings and investments, cars, and even works of art.
This could be global if you are still deemed to be UK Domicile, even though you may not have lived in the UK for years.
How is inheritance tax calculated?
Inheritance tax will usually be payable if your estate exceeds the nil-rate threshold, which will be fixed at £325,000 until 2021. Below this, your estate can be passed to your beneficiaries free of tax. If you own your home and plan to pass it on to your blood relatives when you die, then all or part of this may fall outside of your estate when calculating inheritance tax.
It’s also the case that anything left to either your UK spouse or UK civil partner will be exempt from inheritance tax, regardless of whether the value exceeds your nil-rate threshold. The same applies to exempt beneficiaries, such as charities.
This does not apply to foreign spouses though. Their allowance is also £325,000 so if your estate is worth more than £650,000, they will pay 40% above this.
By leaving 10% or more of your estate to charity, it will usually qualify for a reduced rate and as such, the amount of inheritance tax due will be 36%.
Note: Rates and thresholds are based on current UK legislation and are subject to change.
What is the residence nil-rate threshold, and how is it different to the nil-rate threshold?
If you are giving away your home to your children (including adopted, foster and stepchildren) or grandchildren, you may qualify for the residence nil-rate threshold before inheritance tax becomes due. This will be an additional £175,000 from 2020 to 2021
It will then increase in line with the Consumer Prices Index (CPI) from 2021 to 2022 onwards. The residence nil-rate threshold will only apply up to the value of your property.
If you qualify, your inheritance tax threshold for the 2020/21 tax year will be £500,000 (£325,000 + £175,000). The additional threshold will also be available if you have downsized or ceased to own a home on or after 8 July 2015, if the former home would have qualified for the additional threshold.
There will be a tapered withdrawal of this threshold for estates with a net value of more than £2 million, this will be at a rate of £1 for every £2 over the threshold.
Note: Rates and thresholds are based on current UK legislation and are subject to change.
How is inheritance tax paid?
Your executors or legal personal representatives must calculate the value of your estate, submitting full details to HM Revenue & Customs (HMRC). Typically, they will then have six months from the end of the month of death to pay any inheritance tax due.
Access to the estate can’t be granted to the beneficiaries until this has been done, meaning the release of your estate could be delayed if your loved ones don’t have the funds to pay the inheritance tax bill.
If inheritance tax has to be paid with regards to land, business assets, or property, it’s possible to do so in installments. In certain circumstances, your beneficiaries will then have up to 10 years to pay the tax owed, plus interest.
Why is it important to plan ahead for inheritance tax?
Depending on your circumstances, the threshold value is still less than the value of many family homes. This has led to a view that inheritance tax traps millions of homeowners into giving their wealth to the state, instead of their children. Without any planning, your beneficiaries may be forced to sell assets, such as the family home, in order to pay the bill.
In reality, though, there is no need to panic. Inheritance tax is often referred to as a voluntary tax. With a bit of estate planning, there are ways to massively reduce your inheritance tax liability. In many cases, we can eradicate it completely. Roy Jenkins, former Labour chancellor, once described inheritance tax as something only paid by “those who distrust their heirs more than they dislike the Inland Revenue”!
The main aim of inheritance tax mitigation is to reduce the value of your estate. The smaller your estate when you die, the less your inheritance tax bill is likely to be!
Ways to limit your inheritance tax:
Writing a will – If you die without leaving a will, your estate will be shared out according to the rules of intestacy. This means the law will decide how your assets are distributed.
Should this happen, your estate may not be distributed how you would have preferred, and you are likely to have to pay significantly more tax than if you had left a valid will. By putting a will in place – and keeping it updated – you can ensure that when you die, your estate is shared out according to your wishes, and as tax-efficiently as possible.
Gifts – When it comes to calculating the amount of inheritance tax you owe, the value of your estate will include anything you have given away to a friend or family member, who is not your spouse or civil partner, up to seven years before your death.
Generally, if you continue to live more than seven years after you’ve made the gift, it becomes fully exempt from inheritance tax.
Life insurance – A life insurance policy can be used to provide the funds to pay some or all of an inheritance tax bill, alleviating the stress from your loved ones. This can help prevent assets being sold in order to cover the costs of inheritance tax.
Ensure the policy is written into a trust. Otherwise, the money from the insurance pay-out is counted as part of your estate and subject to inheritance tax – there is no need to own your own life insurance as you need it to go to your beneficiaries.
Setting up a trust – A trust is a legal arrangement where you give cash, property or investments to someone else (the trustee) so they can look after them for the benefit of a third party (the beneficiary).
By putting some of your assets into a trust (which you, your spouse, and none of your children under 18 can benefit from), you are removing them from your estate. You don’t own it anymore. That means their value normally won’t be counted when your inheritance tax bill is calculated.
If you are returning to the UK with some wealth, you should consider the trust options for a returning ex-pat as these were created to encourage you to go home. If you are UK and married to non-UK, you should consider trust options to help keep your offshore assets protected from some UK taxes.
There are lots of different types of trusts and they all have their own rules. So, it’s vitally important to make sure you choose the right sort of trust.
Other benefits of using a trust
- You can retain control of valuable assets until you consider the beneficiary will be responsible enough to manage it. So, if you want to avoid your 18-year-old children squandering your fortune on parties and fast cars, you can arrange your trust, so they won’t receive anything until they turn 25.
- Your beneficiaries can avoid potentially lengthy probate delays.
Inheritance Tax can be an extremely complex area but planning for it in advance will help your loved ones to get the very most out of their inheritance.
Feel free to contact us with your own situation. We would be happy to discuss how to mitigate your own Inheritance Taxes.
