UK Inheritance Tax Planning For UK And Non-UK Residents And Expats

Inheritance law of UK is complicated in nature as in involves conflict of laws (Domicile), situs of the property (UK situated ones) and presumed legal fiction like deemed domicile. It is very difficult to manage all these issues simultaneously especially if other jurisdictions are also involved. Perry4Law Law Firm has been helping international clients in foreign jurisdictions in conflict of law fields for long.

As far as UK is concerned, its inheritance tax should be carefully managed as any single factor is enough to attract inheritance tax in UK. An individual may be liable to pay the inheritance tax even if he is not domiciled in UK as long as the property in question is situated in UK. Similarly, even if the property in question is located in foreign jurisdiction(s), still inheritance law of UK may be applicable if the individual is either domiciled or deemed domiciled in UK. His global properties shall be amenable to inheritance tax in UK.

While handling the cases of our clients from UK and other foreign jurisdictions, we observed that most of them failed to do proper tax planning at the initial stages were much difference can be made. Perry4Law strongly recommends that individuals should engage in tax planning as soon as possible as the consequences of not doing so at the right time can be very costly. On death, UK inheritance tax (IHT) is at a rate of 40%.

IHT is a tax on money or assets held at death and on gifts made during a lifetime when those gifts were made less than 7 years prior to death. However, each individual has an inheritance tax exemption of £325,000. In the case of a married couple this exemption can be passed onto a surviving spouse and after their death, the estate will enjoy a £650,000 tax free exemption.

Gifts made more than seven years prior to death, without the retention of a benefit (such as continuing to live in a gifted property rent free), shall be excluded from the deceased’s estate. Generally, any gifts made within seven years will form part of the estate. However, there are certain gift allowances that can be used year on year, where the seven-year rule is not applicable.

As stated earlier, the UK inheritance rules are largely made applicable based upon a person’s domicile. Such a domicile may be domicile of origin, domicile of choice or domicile by operation of law (like deemed domicile). Due to domicile, there may also be wealth/estate/inheritance tax liabilities in other jurisdictions. Therefore, expert advice should be taken in any jurisdiction where taxes might be chargeable.

The non-UK assets can be managed through a non-UK resident discretionary trust, before acquiring either a UK domicile by choice or through deemed domicile. This would exclude those assets from the UK estate for UK inheritance tax purposes. Following a person’s death, the trustees could distribute the trust assets to the beneficiaries; achieving the same results as a will but passing on the assets free from inheritance tax liability.

It is crucial for both UK and non-UK tax residents to take good legal advice at the earliest and it should be reviewed regularly to accommodate for any changes in the law and/or family circumstances.

Inheritance Tax (IHT) Law, Liabilities And Tax Planning In UK

In simple terms, Inheritance Tax (IHT) is a tax on the estate/properties (both movable and immovable) of an individual having UK connections (like domicile/citizenship). However, liability to pay Inheritance Tax does not arise if:

(a) the value of estate in question is below the £325,000 threshold, or

(b) the concerned person leaves everything above the £325,000 threshold to his/her spouse, civil partner, a charity or a community amateur sports club.

While citizenship and residence are pretty straightforward concepts yet domicile is a private international law/conflict of laws concept and requires expert handling.

If the concerned individual gives away his/her home to his/her children (including adopted, foster or stepchildren) or grandchildren, the threshold would increase to £500,000.

If an individual is married or is in a civil partnership and his/her estate is worth less than his/her threshold, any unused threshold can be added to his/her partner’s threshold when he/she dies.

The standard Inheritance Tax rate is 40% and it is only charged on the part of the estate that is above the threshold. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if an individual leaves 10% or more of the ‘net value’ to charity in his/her will. The net value is the estate’s total value minus any debts.

Some gifts that an individual gives while he/she is alive may be taxed after his/her death. People that an individual gives gifts to might have to pay Inheritance Tax, but only if he/she gives away more than £325,000 and die within 7 years. Depending on when he/she gave the gift, the Inheritance Tax rate on the gift would be less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. If the estate includes a farm or woodland, Agricultural Relief can be claimed.

Funds from the estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will). Beneficiaries (people who inherit the estate) do not normally pay tax on estates/properties they inherit, excpet in few exceptional cases.

Beneficiaries may have related taxes to pay, for example if they get rental income from a house left to them in a will or they receive dividend for shares inherited by them.