If you were born in the UK and have parents from the UK, or you have assets in UK then you should be aware of Inheritance Tax (IHT)
Even if you are British expat, UK inheritance tax (IHT) will be due on global assets 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 (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 tax 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.
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 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. UK spouses can pass their estate to each other tax-free but then their children would receive a bill of 40% over £650,000 when the second parent dies.
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? (https://www.gov.uk/guidance/inheritance-tax-deemed-domicile-rules)
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 (CGT) and IHT.
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 15 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 : https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3
This is also of primary importance during lockdown periods in different countries due to Covid-19. If you “are stuck” somewhere and earning money, be aware that you may stay over the number of days that you are allowed without being classed as a resident of that country – being a resident of a country imposes income tax. For example, as a visitor to the UK, you are allowed to stay 182 days – if you have been in the UK over this period in the fiduciary year (tax-year) then they may claim income tax off your earnings from the period of extension until your exit.
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 have a “non-domicile status” in the UK, only UK based assets will be liable to IHT in the UK.
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, and independent advice 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 – but this takes time.
Secondly, you 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/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 IHT 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 IHT in your new country of domicile.
Protecting your assets from IHT
There are ways to mitigate or remove IHT (from your estate) with efficient planning :-
- Write a will (to ensure all allowances are granted)
- Gift assets now (to reduce the value of your estate)
- Create a Trust (to remove your ownership of assets)
- Insure the bill (cheaper than the bill)
- Set up a pension (future earning so not taxable, and is another form of trust)
- Spend the money (no gift, no tax – but make sure what you have, lasts your lifetime)
Whatever you decide, you need to plan.