The UK’s Inheritance Tax (IHT) is one of the highest in the world.
Admittedly, it’s not as bad as Belgium, where the rate is 80 per cent, but HM Revenue & Customs (HMRC) still levies a 40 per cent tax on your estate when you die.
For many foreign nationals moving to the UK, the fact their beneficiaries will have to pay tax on their inheritance is surprising.
Having said that, IHT – whilst not universal – isn’t uncommon:
- Belgium – 80 per cent
- France – 60 per cent
- Japan – 55 per cent
- South Korea – 50 per cent
- Germany – 50 per cent
- United States – 40 per cent
- Netherlands – 40 per cent
- Ecuador – 35 per cent
- Spain – 34 per cent
As a foreign national living in the UK, you don’t want to face unexpected financial burdens, so it’s best to get a handle on how you can mitigate IHT and plan for it in advance.
Note: IHT rules may differ based on your residency status and the geographical location of the assets you own.
What is Inheritance Tax?
IHT in the UK is applied to your estate upon death.
Your estate includes all property, money, and possessions.
The standard IHT rate in the UK is 40 per cent on the value exceeding the nil rate band, currently set at £325,000.
If your estate’s value is below this threshold, no IHT is due.
Your obligation to pay IHT depends on your domicile status, which refers to the country HMRC considers your permanent home.
Domicile is different from residency, which is based on physical presence in the UK during a tax year.
Holding a UK passport doesn’t automatically establish UK domicile.
The rules can be complex, so consulting a tax professional for clarity is advisable.
Will IHT affect your worldwide assets if your domicile status is in the UK?
Yes, if you are deemed domiciled in the UK, IHT applies to your entire estate worldwide.
This means the value of your estate, including foreign assets, is subject to IHT if it exceeds £325,000.
You may want to pack your bags and run for the hills after reading this – but it’s not all doom and gloom!
There are practical steps you can take to protect your estate and enjoy your domicile status in the UK.
How to mitigate the Inheritance Tax you pay as a UK domiciled individual
Effective estate planning is essential in reducing your IHT bill.
Here are some key strategies we use when helping our clients:
- Business Property Relief (BPR): BPR can reduce IHT liability on business assets. Qualifying companies may receive up to 100 per cent relief on business shares if trading, not just holding investments. Ensure your business meets HMRC requirements and keeps proper documentation like financial statements. Structure your business to maintain eligibility for relief. Incorporating business assets into your estate plan can help preserve wealth.
- Passing assets to your spouse: Non-domiciled spouses can inherit unlimited assets from their spouse without paying UK IHT, provided they are married or in a civil partnership. However, if your spouse has UK domicile status, you might be liable for UK tax on your worldwide assets upon inheritance.
- Double Taxation relief: Inheriting assets from abroad involves unique tax considerations. To mitigate this, the UK has double taxation treaties with many countries, offering relief options like unilateral relief or bilateral double tax conventions, which can lower your UK IHT liability on assets taxed internationally. Consulting an international tax expert is important to identify which countries have taxation treaties with the UK.
- Gifting your assets: Gifting an asset and surviving for seven years makes the transfer exempt from IHT. If you die within those seven years, the gift’s value will be part of your taxable estate. You can gift up to £3,000 per tax year without it being counted towards your estate. This allowance can be carried forward to the following year.
Moving to the UK and having to familiarise yourself with a whole new set of tax rules can certainly be daunting, especially if you are concerned with the handing down of your assets.
Getting it wrong could be seen as tax avoidance and may result in penalties and potentially criminal prosecution.
Luckily, with the help of a tax adviser, you can reduce your IHT bill and manage this complex process.
