UK inheritance tax for expats
[Estimated time to read: 4 minutes]
My dad often uses a few popular sayings.
Last night's was depressing.
“…nothing’s certain but death and taxes…”
We were talking about an article I’d read about inheritance tax (IHT) planning.
The article said that only 27% of Brits over the age of 45, and over the IHT threshold, have sought professional IHT planning advice.
Few understood their liability.
Fewer understood how to mitigate it.
From experience, I know far fewer expats understand their liability and how to mitigate it.
My dad hit the nail on the head – as Brits – even British expats – we can’t totally avoid inheritance tax…
But, as expats we do have some options open to us to mitigate our liability.
Here’s a quick breakdown of some of your options.
Why some British expats are liable for IHT
Your liability for UK IHT depends on just two things:
#1. If you are deemed domiciled in the UK:
If you or your father were born or raised in Britain, you are likely to be deemed domiciled in Britain.
Your worldwide estate may be at risk of IHT.
Domicile is entirely different to residency.
Don’t make the mistake of thinking that because you’re a tax-free resident in the UAE for example, that you aren’t liable to UK IHT!
#2. How much your estate is worth when you die:
If your worldwide estate is worth more than the £325,000 nil rate IHT band, it may be at risk of IHT.
Recent IHT changes – the family home allowance
From last month, a higher threshold - including a family home allowance - is being phased in.
This will be worth an extra £100,000 per estate in 2017-18 – rising to £175,000 by 2020.
However, if your estate is worth more than £2m, you start to lose this new tax relief at a rate of £1 for every £2 over the limit.
From 2020, when the full allowance is in place, as soon an estate has reached £2.35m (£2.7m for couples) it will lose all the new home allowance relief.
This affects those leaving everything to their spouse/partner, which tends to be the most common arrangement among Brits.
If a couple has an estate worth £1.5m each, and one dies the surviving partner would end up with a £3m estate – which wipes out their home allowance benefit.
This reduces the total estate size, and maximises the family home allowance.
Understanding the couples allowance
The nil-rate band above which IHT becomes an issue is currently £325,000 per person (£650,000 per couple).
The nil rate bands of surviving spouses/civil partners may be increased by unused bands of deceased partners.
The new home allowance means that from 2020, married couples/civil partners will be able to pass on estates worth up to £1m to their direct descendants (typically children/ grandchildren).
Those who sell an expensive property to downsize or pay for care home fees for example, can still qualify for this new threshold if most of their estate is left to their direct descendants.
How else can expats mitigate IHT?
Here are a few suggestions to consider – however, you should seek personal advice to find IHT mitigation strategies appropriate for you: -
You can gift assets to anyone.
As long you survive for 7 years, your gift will be free of IHT.
You can also take out insurance in case you don’t survive for 7 years.
#2. Discretionary trust
These can be used if you want to retain control over your assets, but remove them from your estate for IHT purposes.
They are often used by parents/grandparents.
Beneficiaries and terms of discretionary trusts can be changed by the trustees.
As with gifting, the "settlor" (the person placing the assets in trust) needs to survive seven years for those assets to move entirely out of their taxable estate.
#3. An absolute or bare trust
No tax is payable when assets go into such a trust. However, they are relatively inflexible as beneficiaries cannot be altered.
How to avoid IHT headaches
#1. Get a will that is valid
Make an appointment with a lawyer to get your will(s) drafted:
Each of your wills need to be valid for the country you live in, AND where your assets are held.
We, at AES, have access to a qualified will writer.
#2. Speak to a chartered financial planner
There are many options open to you to reduce, offset and mitigate inheritance tax.
A chartered financial planner will identify your options, explain them in plain English, and implement a plan for you.
How we can help you
As with most things in life, having a plan is a good place to start.
AES International is the only Chartered Financial Planning firm outside the UK that focusses exclusively on helping international people, expats and non-doms.
We have extensive expat inheritance tax planning experience in-house.
And if you’d like a free consultation to discuss your potential liability and what you can do to mitigate it, contact us today.