As Mr Benjamin Franklin once famously said, there are only two certainties in life, and that these are death and taxes. However, it is common for the two things to happen at the same time. Hence the term ‘not only do I pay tax all of my life, but I also pay tax when I am dead’.
The threshold for inheritance tax (IHT) in the UK is £325,000, rising to £650,000 for a married couple. The entire estate of someone who dies with assets over this threshold is then taxed at 40%. This can significantly reduce the value of the assets that might be left to your relatives or friends. The only exception is ‘family home allowance’, which will rise to £175,000 by 2020 to help people who want to leave their main residential property to their children.
There is a significant difference between being resident in the UK and being ‘domiciled’ in the UK. You are generally not a UK resident unless you spend 183 days in the country in any tax year among other factors. However, you could be domiciled in the UK even if you don’t consider yourself to be British. Anyone with a UK domicile is liable to pay UK tax.
While many UK residents incorrectly think IHT is only paid by the rich – given today’s property values, this is most certainly not the case. Many expats living abroad also mistakenly believe they do not need to worry about their estate being taxed in the UK. This usually is because they ‘left’ the UK years ago and feel disconnected from it. IHT planning abroad is crucial.
Unlike citizenship, you can only ever be domiciled in one country at any time. You would first acquire a domicile at birth. If your parents were married, then you would take the same domicile as your father. If your parents weren’t married, you would take the domicile of your mother at the date of the child’s birth.
When you became an adult, it would then have been possible for you to apply to change your domicile. You can only change your domicile to that of another country if you have a clear intention to live there permanently or indefinitely.
The UK authorities would only accept you are relinquishing your UK domiciled status if you demonstrated that you had no intention of returning to the UK. They may want to see evidence of this, such as you handing back your UK passport, selling your UK properties or closing your UK bank accounts. If your parents changed their domicile in this way, and you were under 16 at the time, you would then have acquired their domicile.
This all means that you could be UK domiciled if any of the following apply. If you were born in the UK, if one of or both of your parents were born in the UK and if you were brought up in the UK. Even if none of these applies, you could still be ‘deemed domiciled’ for tax purposes by HM Revenue & Customs if you lived in the UK for 15 of the previous 20 years. This could potentially have implications for the estates of people who leave the UK when they retire, and who then, unfortunately, pass away before they have enjoyed a long and fulfilling retirement.
Once it is determined that you are domiciled or deemed domiciled in the UK, you are then subject to the UK tax system. Changing your domicile from the UK to another country doesn’t completely solve the problem either. For inheritance tax purposes you would still be liable for UK inheritance tax if you died within three years of changing your domicile. So, this demonstrates that a great many UK expats are likely to be liable for IHT.
If you are UK domiciled, the UK authorities will apply IHT on your entire estate, regardless of where the assets are located. The tax thresholds are the same as for UK residents, i.e. £325,000 for a single person and £650,000 for a married couple. In contrast, individuals who aren’t domiciled or deemed domiciled in the UK will only be subject to UK IHT on UK assets.
This is a very complicated area, so the best course of action might be to seek advice from a qualified Financial Adviser who specialises in IHT planning. Firstly, your Financial Adviser can establish if you will be subject to IHT in the UK. As despite being a complex area, there are certain things you can do to mitigate your IHT liability, including:
Inheritance Tax Planning for British Expats living abroad is typically overlooked as people feel little connection with the UK system after living abroad for many years. That does not mean your estate will not be taxed in the UK though. IHT is an essential area of financial planning. Our Financial Advisers look forward to advising you on your situation and how to minimise your IHT obligations.
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