Inheritance tax (IHT) 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, IHT 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 IHT in that trust and sometimes people may have to pay IHT on gifts received. However, the payee of IHT is dependent on a number of factors, and each circumstance may affect who should pay the IHT owed.
British expats and non-residents are liable for UK IHT
Even if you are an expat living outside of the UK, you will still be subject to IHT 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 IHT - 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 IHT threshold to the second partner when they die.
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 IHT.
If you've got a non-domicile status in the UK, only UK based assets will be liable to IHT in the UK. However, “living outside of UK” is not a qualification for this status alone.
Understanding UK IHT as a non-UK expat
Even if you have a “special structure” that holds UK assets, your estate would have to pay UK IHT on the value above GBP325,000 or GBP475,000 if you are leaving assets to your children. This is 40% above the thresholds.
The rules changed in April 2017 and most people are still buying UK assets without this knowledge! Any assets in the UK are liable for UK IHT.
Over GBP35,000,000,000 is invested in London properties from foreign investors. HMRC are looking forward to IHT coming in the future.
Mitigating UK IHT as an expat
IHT is commonly defined as a tax on people who fail to plan their estate tax efficiently. With careful planning, it is possible to legally avoid a significant amount of IHT in the UK.
In a nutshell, there are two primary methods for expats to legitimately avoid UK IHT 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 (almost impossible unless certain steps are taken.) Secondly, and this is where planning can help, you can protect your estate from IHT 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 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 IHT being such a major revenue earner for the UK government (they collect over GBP5.4 billion a year) 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:
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 IHT 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 IHT
Avoiding IHT 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 (me) who will be able to talk you through each of your options.
If you believe your estate is worth more than £325,000 (this is the cost of a a car-parking space in Hong Kong,) through the use of a number of tax efficient financial structures you can not only avoid IHT 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 IHT.
Request free inheritance tax consultation
Helping expats reduce or avoid IHT is one of the specialists’ services I offer.
If you are concerned about potential IHT or would like clarification on how to legally avoid UK IHT, feel free to contact me.
Your initial consultation is free and will enable you to find out how you could avoid any potential IHT on your assets, including capital gains and income taxes.
We’re here to help and answer any question you might have. We look forward to hearing from you.