Even after living abroad for many years, expatriates may still be liable for UK inheritance tax. HMRC's record £4.6bn inheritance tax collection is a good reminder to check your legacy will go to the right place.
HM Revenue & Customs has benefited from a record £4.6bn inheritance tax collection for the 2015/16 tax year. That was an increase of 21.6% – more than a fifth – compared to the previous year. Figures released by the Office for National Statistics in April revealed that British families had paid over £4bn in inheritance tax in the 12 months to February and that the tax office was expected to take £4.6bn for the tax year.
As an expatriate you may think that UK inheritance will not affect you. However, it is where you are domiciled that determines whether you are liable, not where you are resident. Even after living abroad for many years, you could still be seen as a British domicile in the eyes of HMRC and therefore fully liable for UK inheritance tax. To make sure your legacy goes to the right place it is crucial to understand the ins and outs of the rules in both the UK and your country of residence.
Why did HMRC enjoy such a bumper revenue crop this year?
It is not just down to the UK government casting a wider net. First, quite simply, there was a marked increase in the number of deaths, partly due to the aggressive flu virus last year. The Treasury estimates that this brought in around £200m more than usual.
Second, the increase in house prices generally has brought more households over the £325,000 tax threshold (£650,000 for couples). Thanks to this trend the number of family estates paying inheritance tax has quadrupled since 2010, say the Office for Budget Responsibility (OBR), from around 10,000 to more than 40,000 this year. With no sign of property values waning, the Treasury expects this number to double over the next five years.
Is there relief on the horizon?
Next year the government will introduce more breathing space as it begins phasing in higher allowances on property for homeowners. Starting with an additional £100,000 from April 2017, the new allowance will peak in 2020 at £175,000. For couples, this will mean they can potentially leave up to £1m worth of property tax-free, but only five years from now. By then, the financial impact of the proposed changes will most likely be dampened by the continuing trend for soaring house prices, estimated by the Royal Institution of Chartered Surveyors to increase by up to 25% over the next five years.
In addition, the new allowances may not apply at all for estates worth over £2m. Other complex conditions for eligibility are also likely to limit who can benefit. For example, allowances look set to only apply to property that you have lived in and left to direct descendants. As a result, the new reforms have been labelled overly complex and unfair by many commentators, even from within the same government that set the policy in the first place.
With a 40% rate on anything over the current (relatively low) threshold, it is easy to see how inheritance tax has caught out so many people and given such a boost to the Treasury coffers. The complicated and limiting new allowance structure is unlikely to reverse this upward trend in the years to come.
Why should you care?
Remember, even if you no longer live in Britain, you can still be affected by UK inheritance tax. Domicile law is extremely complex and there are a number of ways in which your domicile status can be assessed for inheritance tax liability. That is why it is essential to get professional guidance to make sure everything is in place for your estate to be distributed as you wish and ensure your heirs avoid paying unnecessary tax. It may be your heirs and/or executor who have to prove to HMRC that your estate should not be liable to UK inheritance tax so it is vital to leave all your paperwork in order for them.
Involving inheritance taxes and succession law of more than one country further complicates matters. You should speak to an adviser with specialist knowledge of both countries to help you understand how UK inheritance tax interacts with the local inheritance tax in your country of residence. By taking steps now to secure your estate, you can make sure your legacy ends up in the right hands without paying more tax than necessary.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
Any questions? Ask our financial advisers for help.