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
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.