More families than ever caught in the UK inheritance tax net

The 2022/23 tax year proved to be yet another record year for UK inheritance tax (IHT) receipts. This is expected to keep growing, so what can you do to protect your family and heirs from this death tax?  Since liability is generally based on domicile or situs of the asset rather than residence, this is a UK tax that continues to affect British expatriates.

HM Revenue & Customs (HMRC) received an extra £1 billion over the last tax year, generating a total of £7.1 billion.  And the number of people paying this unpopular tax jumped 24%, up from 33,000 the previous year to 41,000.

The government expects IHT revenue to continue to increase, bringing in £38 billion over the next five years.

Frozen reliefs and rising property prices

The standard inheritance tax nil rate band has been frozen at £325,000 since 2009. It is scheduled to remain fixed until April 2028, by which time it would have been frozen for 19 years.

In contrast, house prices have of course risen over this long period, pushing more estates into the IHT net.   Other assets will also have increased in value over the years, and more and more families are now paying a tax that was once designed to only hit the wealthy.

The residential nil-rate band was introduced in 2017 to help protect families, but it has its limitations.  Starting at £100,000 it increased to £175,000 in 2020/21, but is now also frozen until 2028.

Any unused nil band is transferable to a spouse on death. When the £175,000 residential nil rate band is combined with the standard £325,000 allowance, couples today can potentially pass on up to £1 million tax-free, or £500,000 for individuals.

Note, however, that the residential nil rate band only applies to a main home that is passed to children and grandchildren, and where the estate is valued under £2 million. Higher-value estates are subject to a tapering system that eliminates the residential nil rate band entirely when an estate exceeds £2.35 million.

Is your estate liable for UK inheritance tax?

UK inheritance tax is charged on death and lifetime gifts. If you are a UK domicile it applies to your worldwide estate, regardless of where you and the recipients are resident.  Non-UK domiciles are only assessed on UK-situated assets.

Your liability is calculated on your entire estate – all property, savings and investments, insurance policies not in trust, household contents, jewellery, vehicles, etc. Outstanding mortgages and loans are generally deducted from the total.

If the total value of your estate is lower than the two allowances (£325,000 + £175,000 for the main home), then your heirs do not have to pay this tax.  If your estate exceeds the thresholds, your heirs pay 40% tax on the excess.  Where the allowances are not used on the first death, or only partly used, the balance can be transferred to the surviving spouse/civil partner – so make sure your estate is set up to take full advantage of this.

Expatriates and the domicile issue

UK inheritance tax follows you around the world since your estate is liable for as long as you remain a UK domicile. Domicile is a complex and adhesive UK common law concept, and many British expatriates are UK domiciled their whole life.

That said, you can take steps and cut ties with the UK to adopt a domicile of choice in your new country of residence, though it can take up to four years to shed a UK domicile for inheritance tax purposes. Getting your domicile status wrong could result in an unexpectedly large tax bill for your family, so professional advice is essential here.  Blevins Franks provides a domicile determination service so get in touch with us to find out more.

UK inheritance tax planning

Inheritance tax is often referred to as a voluntary tax since there are various steps you can take to eliminate or reduce the liability for your family and heirs.  Don’t risk leaving it too late, especially if you are planning on making lifetime gifts (‘potentially exempt transfers’).

Cross-border estate planning can be a minefield – more so if you are subject to inheritance taxes in more than one country (as is often the case with British expatriates in Spain, for example) – so take specialist advice today to get it right and take advantage of the planning opportunities available.

Contact Blevins Franks today.