How much inheritance tax will your estate be paying to the UK taxman?
Written by Tony Mustafa on July 11, 2019.
If you are a British expat living in Asia, the likelihood is that you are still domiciled in the UK, and that means that when you die, if you own assets that are worth over certain thresholds, your worldwide estate will be subject to UK inheritance tax (IHT) in the UK.
If this is an issue which you’ve been sweeping under the carpet (which many people do!), I recommend that you lift the carpet up and drag it out into the open as the ostrich approach is not going to protect your estate whereas taking appropriate action can.
Here are some of the most common questions my clients have about IHT, along with some answers:
Am I UK domiciled?
It is important to distinguish between residence and domicile. You may have lived in Asia for decades but you should never assume that you are not domiciled in the UK. It’s actually pretty hard to change domicile. The four factors taken into account for determining domicile are as follows:
Nationality of your parents
Financial links that you maintain with the UK
The chance that you will return to live in the UK
If you were born in the UK to British parents, maintain a bank account and property in the UK and/or expect to return to live there at some point, you are very likely to be deemed UK domiciled. If you are unsure about your domicile, it is worth speaking to a cross border tax specialist to clarify your situation. The answer will be crucial to your financial planning.
What is the UK IHT threshold?
The threshold currently stands at £325,000 per person, known as the nil rate band. The nil rate band can be transferred to a surviving spouse or civil partner if they too are UK-domiciled giving a couple a total £650,000 threshold. If your spouse or civil partner is domiciled elsewhere, different rules may apply.
What rate is IHT charged at?
Anything over the £325,000 threshold is usually charged at 40% although this is reduced to 36% if at least 10% of a net estate is left to charity.
Is my home subject to IHT?
As property prices in the UK have risen while the nil rate band has remained static, more and more property owners have been drawn into the IHT net. To address this, the government introduced new legislation in 2017 known as the main residence nil rate band. This gives an additional threshold to home owners if they are passing property that is their principle residence to a direct lineal descendant. For the 2019/2020 tax year it is £150,000 rising to £175,000 in 2020, and will increase in line with the Consumer Price Index thereafter.
Can I change domicile to mitigate IHT?
This is an extreme measure to take to mitigate IHT and should be considered extremely carefully. Not only is it difficult to do (near impossible if you have UK-based assets) but it will also have very serious repercussions. You will need to adopt a new nationality, relinquish your British passport and cut all ties with the UK. The burden is on you to prove to the taxman that you have acquired a new domicile. Also, bear in mind the wider consequences of cutting ties in such a severe way and the implications that could have on your family and your rights. Be aware too that you may be opening up an IHT can of worms in your adopted country. Professional advice is a must before taking this drastic step.
Are there any other ways to mitigate paying IHT?
There are a few perfectly legal ways of mitigating your IHT burden. Gifting to your loved ones is one option as no IHT is payable on gifts as long as you survive for seven years after making the gift. The rules are outlined on the UK government’s website here. Other options include using life insurance and trusts. This is a really complicated area with legislation which constantly changes so I strongly recommend that you take advice from a professional.
I know many people push estate planning down their agendas thinking that it is something they don’t need to think about quite yet but, given that none of us have a crystal ball to tell us how much more time we get to enjoy this wonderful world, it really does make sense to put estate planning to the top of your to do list if you have assets. This is the case however old you are but the urgency increases as you reach middle age.
I would be happy to chat through your situation with you and discuss your estate planning options as part of a comprehensive financial plan. Please contact me at firstname.lastname@example.org if you would like to tackle this tricky but important task.