Five things expatriates need to know about UK inheritance tax

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While domicile and property can affect inheritance tax liability, available reliefs can prevent your heirs from paying more tax than necessary.

With UK inheritance tax rates at 40% – potentially on your worldwide estate – it pays to understand the rules and how you can best protect your heirs. 

Year-by-year, inheritance tax revenue continues to soar for the UK Treasury, with more families getting caught in the net. A record high of over £5.4 billion was collected in the 2018/19 tax year – over double the amount from nine years ago.

For expatriates, it can be especially difficult to know where you stand with UK inheritance tax. But with an average inheritance tax bill of £179,000 paid for each affected estate, it pays to understand your position and what you can do to minimise exposure for your heirs.

1. You could still be UK-domiciled

Even after many years of living abroad, you could still be considered UK-domiciled, bringing your worldwide estate into lability for 40% UK inheritance tax. This could be the case, for example, if you still hold UK assets or show intentions to return one day.

While it is possible to adopt a domicile of choice overseas by severing all ties with the UK, domicile law is extremely complex. Also, new rules could mean that returning to the UK for a relatively short period – say, due to family illness – could reignite inheritance tax liability for non-domiciles. For the best outcome here, seek specialist, personalised guidance.

See more about the changes to UK domicile rules

2. It affects UK assets, regardless of domicile

Even if you are domiciled outside the UK, any British assets you own will attract UK inheritance tax. Note that before 5 April 2017, property owned through a corporate structure (‘enveloped’) was generally exempt, but now all UK residential property is liable, however it is owned. So if you hold UK residential property in this way, explore your options for the most tax-efficient way forward.

3. A new relief was recently introduced…

Between 2009 and 2017, the only available inheritance tax relief was a £325,000 nil-rate band (£650,000 for couples). But since April 2017, the ‘residential nil-rate band’ or ‘family home allowance’ has provided extra relief when passing on a main home to direct descendants.

The good news for expatriates is you can claim this allowance on a property outside the UK, provided it is your main home (although local inheritance taxes may still apply).

At £150,000 in the 2018/19 tax year, the UK’s tax-free threshold increases to £175,000 in April 2020 before it starts tracking inflation. As with the standard allowance, you can transfer any unused balance to your spouse/civil partner, making a total potential threshold of £1 million for a couple by 2020/21.

4. …but it has limitations

To be eligible for the allowance, the property must be recognised as your main home. As you must have lived in it at some point, this excludes most investment properties. It is only available on one property that is passed directly to children or grandchildren, so homes owned indirectly through certain trusts, for example, may not qualify.

Also, larger estates will not receive full relief – estates worth over £2 million have a lower threshold, and those valued over £2.25 million are not currently eligible at all. Note that your entire estate is counted here – including savings and investments, certain trusts, pay-outs from life insurance policies, pension lump sums from the death of a spouse/partner, cars, furniture and personal belongings such as jewellery.

See more on the new inheritance tax threshold

5. Your home could tip you over the threshold

Despite the new allowance, the government’s inheritance tax coffers continue to swell in large part due to the increasing value of assets – particularly property. As house prices have risen, so has the number of estates that fall outside the tax-free thresholds – and the amount payable. If, for example, combined assets exceed the £2.4 million value threshold for the property relief in 2020/21, the £175,000 allowance could be replaced by a £70,000 inheritance tax bill.

Additionally, the standard relief – frozen at £325,000 since 2009 and fixed until 2021 – has not kept pace with inflation in the way that the value of property or other assets has. The UK government’s Office for Budget Responsibility predicts the inheritance tax haul is on track to exceed £6.3 billion by 2023/24 as asset growth continues.

However, there are ways to mitigate UK inheritance tax other than gradually transferring (or spending!) your wealth within your lifetime. Expatriates can explore using locally compliant investment structures, for example, or acquire a domicile of choice overseas.

An adviser with specialist, cross-border expertise can help you establish your domicile status and how UK inheritance tax interacts with the local inheritance tax in your country of residence. With good estate planning, you can structure your wealth to take advantage of all reliefs available and ensure your legacy ends up in the right hands without leaving your heirs an unnecessarily large tax bill.

Find out about our estate planning services

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; individuals should seek personalised advice.

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; individuals should seek personalised advice.