For British expatriates the reduction in income tax on salary that comes with residency in certain jurisdictions can be highly advantageous. Income and capital gains tax is often spoken about amongst the British expat community, however, the tax that is often forgotten about, or at least not talked about anywhere near as regularly is that of inheritance taxation.
Inheritance tax can be a complicated subject for expats who often have circumstances that we see less commonly within UK residents, for example, it is reasonably common for UK Domiciled individuals to be married to non UK Domiciled individuals. Further, it is also reasonably common to come across British individuals who are no longer domiciled in the UK and are not even aware of it. If you are in either of these situations, or are simply not sure, then get in touch and get some advice.
UK IHT is paid by UK Domiciled individuals on their worldwide estate when they die (subject to certain double taxation treaties) and is usually paid on UK assets only if you are not domiciled in the UK. The issue of domicile is a complex one which is often confused with residency – the two things are not the same!
If you are unsure of your domicile, or believe there is a chance you may not be UK domiciled (ie you weren’t born in the UK or your parents were not), then get in touch.
For a domiciled married couple, the bottom line up front is that, assuming you leave your main residence to your direct descendants, you can currently leave GBP 1m free of IHT (breakdown shown below). After that, there will be a tax of 40% on everything above the million. Further, if you have assets totalling more than GBP 2m it gets worse as one of the allowances starts to be lost. Definitely get in touch if you are starting to creep towards or have gone above the GBP 1m mark.
Now, let’s look at some of the most common ways to avoid inheritance tax
- 1. Understand The Situation
- 2. Understand Your Wealth
- 3. Understand the reliefs available to you
- 4. Understand the tools available to you
1. Understand The Situation.
- Asset Location. It is important that you understand the taxation rules applied in the state where your assets are located. They may be different to the state that you originally come from so understanding who holds taxing rights over the asset is key.
- Individual location. It is important that you understand whether your own residency or domicile impacts the taxation applied to your assets. It is also important to understand the same information for your spouse.
2. Understand Your Wealth.
An obvious point, but if you had not made it home last night, what would the financial situation have been this morning. A lot of people simply do not know the value of their estate if they were to decease which clearly needs to be rectified in order to tackle IHT.
A combination of points 1 and 2 will lead you to ascertain whether there is a problem that needs to be addressed.
3. Understand the reliefs available to you.
Lots of countries have reliefs available regarding IHT, it is generally not 100% of the estate which is taxed. Understanding these reliefs is going to allow the individual to understand how they can organically reduce IHT.
4. Understand the tools available to you in order to further reduce IHT.
It is normal to have options concerning further reductions in IHT. Some examples of these could be:
a. Making a Will
b. Keeping below relief thresholds
c. Gifting assets
d. Use of trusts
e. Life insurance
f. Gifts that fall under the relief rules
g. Spending money
h. Leaving money to charity
Summary
Generally, a combination of these things are going to be the best solution but we would have to go through individual situations in order to determine the best course of action for you specifically.
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Looking around, I find that there is little guidance on life insurance as a product. Like any other product, there are various options, providers and types available on the market. With most other products of this nature we would seek advice, however, with life insurance lots of people are willing to simply go online, get a quote and buy the cheapest option they find.
It is probably fair to say that most of us actually ‘need’ some life insurance and that it’s purpose is to provide for those most important to us in a tragic scenario. Therefore, why would we not look to get advice on how we calculate the correct amount, especially when considering the significance?
So let’s look at some of things we should consider but please do get in touch to go through your particular circumstances:
1. Don’t Guess The Amount Of Cover Needed.
Many expatriates will guess the amount of cover they need. Meeting people with half a million dollars or a million dollars of cover is not uncommon. Equally, arbitrary statements such as ’have 10 times your salary’ are also reasonably useless. Life insurance is like any other insurance, in that it exists to cover liabilities and these can be calculated through a logical process.
2. It Isn’t Health Insurance.
A common misconception is that the health insurance, provided by your employer, is the same as Life Insurance – it is not. Health insurance will pay treatment costs if you break a leg, for example, but it is not going to pay out if you die unexpectedly. That said, it is not uncommon for employers to provide Death in Service Benefit although the terms of this can vary wildly from employer to employer.
3. What About Tax.
Depending upon the circumstances, life insurance can be taxable upon the death of the client. This can, somewhat, make it pointless. Often, however, this can easily be mitigated by placing the policy into a trust which can generally be done free of charge. Indeed, any policies already in existence can generally be placed into trust also.
4. What if you were to fall ill?
Statistically, we are much more likely to fall ill prior to retirement than we are to die, so don’t forget about Critical Illness Cover. The general rule of thumb here is that anything from 6-24 months worth of salary should be held as Critical Illness Cover. If you were to get sick and be unable to work for a year or so then this would enable you to get treatment whilst still pay the bills. Of course, some could argue that you could be ill for longer than this, which is true no matter how unlikely, but CIC will always be more expensive than life cover and, therefore, there is a balance to be struck.
5. Choose A Reputable Provider.
The whole thing would be a rather pointless and a tragic waste of money, were the policy not to pay out if your loved ones ever tried to claim on it, so don’t use an unknown provider. Choose a large, well known outfit, with a reputation for honouring honest claims.
6. Consider The Options.
Both level and decreasing term have their uses. Take advice on which one best fits your circumstances and why.
7. How Long Should You Have It?
The ‘term’ is selected at the outset. So it is important to include it as a consideration within the logical process that also assists in helping us calculate the amount of cover required.
As always, please do reach out to me if you’d like to go through the process and work out how to best protect your loved ones.
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To read further on the triple lock pension pledge, heres the link I mentioned in my video by the BBC, 👉🏼 👉🏼 👉🏼 👉🏼 click here.