Inheritance Tax | Protecting Your Legacy & Pension
LEARNING OBJECTIVES
At The Wealth Genesis, we’re passionate about providing free, high quality and up-to-date financial information to Expats around the world.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
What Inheritance Tax is and who has to pay it
HMRC Reliefs afforded to individuals
Why domicile is so important when considering Inheritance Tax
The options available to mitigate and reduce potential Inheritance Tax bills
UK inheritance tax is potentially due when a UK domiciled individual passes away and leaves behind valuable things like money, property, or possessions. It's a tax on the value of what they leave behind.
However, not everyone has to pay this tax. It's the responsibility of the person who inherits or receives these valuable things. There's a certain amount of money or valuable items that can be inherited without having to pay this tax, and it's called the ‘inheritance tax threshold’.
If what you inherit is worth more than this threshold, then you might need to pay some tax on the extra amount. But if the value is below this threshold, you generally won't have to worry about paying this tax. It's important to remember that the rules and thresholds can change, so it's a good idea to check the most recent information if you're dealing with this situation
In the last tax year, more than £7 billion worth of inheritance tax was handed over to HMRC in the UK. The rules around inheritance tax can be hard to understand at first, even more so when you’re an expat. But not to worry, our expat retirement guide will walk you through everything you need to know.
Are British Expats Liable For UK inheritance Tax?
If your permanent home is abroad, inheritance tax is only paid on your UK assets, such as property or bank accounts you have in the UK. It’s not paid on ‘excluded assets’ like foreign currency accounts with a bank, overseas pensions or holdings in authorised unit trusts.
Even if you are an expat living outside of the UK, you will still be subject to inheritance tax in the UK if you are deemed to be of UK domicile status. HMRC will treat you as being domiciled in the UK if you either lived in the UK for 15 of the last 20 years or had your permanent home in the UK at any time in the last 3 years of your life.
If you are deemed UK domicile, and your estate is valued at over £325,000, your estate will be subject to inheritance tax - either 40% or 36% on the amount over the threshold. In 2007, the threshold increased to £650,000 for married couples and civil partners, providing the executors transfer the first spouse/partner unused inheritance tax threshold to the second partner when they die. HMRC also introduced a nil-rate main residence band, given the rapidly rising values of properties around the UK.
Reducing UK Inheritance Tax As An Expat
Inheritance tax is often referred to as a burden on individuals who fail to plan their estate tax efficiently. With careful planning and professional advice, it can be possible to legally avoid a significant amount of inheritance tax in the UK.
There are two primary methods for expats to legitimately avoid UK inheritance tax and ensure you can pass on as much of your estate to your loved ones as possible. The first option is to change your country of domicile away from the UK. The second option is to protect your estate from inheritance tax by moving them into a tax-efficient financial structure, which is where the financial advisors will be able to support.
Changing Your Country Of Domicile
Although there is no legal definition of your country of domicile, it will often come down 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 government will look at your circumstances and draw their own conclusion about whether you are still domiciled in the UK.
Given that inheritance tax is such a big revenue earner for the UK government, changing your domicile can be a difficult and stressful process.
Preventing Inheritance Tax
If you think your estate is going to be more than £325,000, look to using tax-efficient financial structures to not only avoid inheritance tax but also potentially increase the final value too. For example, setting up trusts for life assurance payouts, payment of gifts or transferring your pension pot can help you avoid inheritance tax.
Inheritance tax is a burden for those who fail to prepare in advance. With considered, careful and expert financial planning, expats around the world can structure their finances such that their assets do not fall within the IHT criteria.
If you need more support on retirement planning as an expat, check out our Expat Retirement Guide for planning and preparing a fulfilling retirement while living abroad.
To arrange a consultation with our specialist advice team, simply complete our online form.
