Inheritance tax is one of the most unpopular taxes in the UK, and it follows British expatriates around the world. It is based on domicile rather than residence, so even though you may now be non-UK resident, your estate could easily be liable for this tax, even if you do not have any assets in the UK…
Inheritance tax is one of the most unpopular taxes in the UK, and it follows British expatriates around the world. It is based on domicile rather than residence, so even though you may now be non-UK resident, your estate could easily be liable for this tax, even if you do not have any assets in the UK. British expatriates need to keep up to date with this tax, as any changes may affect their estate planning.
UK inheritance tax is a combination of a death duty and in some circumstances a gifts tax. If you are a British domicile, it is charged on your worldwide estate at the time of your death, plus any assets you have given away as gifts over the last seven years. It is also payable on certain lifetime gifts.
Non-domiciles are not liable on their worldwide assets, but they are liable on any assets situated in the UK.
The current “nil rate band” or “inheritance tax threshold” – the amount of your estate that can be inherited tax free – is £325,000.
This is per individual, and any unused portion can be carried forward and used by the second spouse (the rules applying to spouses also apply to civil partners) on their death, giving a couple a potential combined threshold of £650,000.
Over the threshold, tax is charged at a fixed rate of 40%. Since April 2012 this will be reduced to 36% if you leave at least 10% of your estate to qualifying charities.
Inheritance tax is often described as a “voluntary” tax due to the number of measures which may be employed to mitigate or completely avoid this potentially onerous tax. You should seek advice from a firm like Blevins Franks which specialises in tax planning for British expatriates, and on how the UK rules interact with the local ones – you cannot look at the UK rules in isolation.
Nil rate band frozen for longer
As announced in the UK March Budget, the threshold will be frozen until at least 2018.
The money this generates for the state will contribute towards the cost of social care for the elderly. We can expect to see more tax rises, directly or indirectly, in future as governments need to find more revenue to pay for longevity related costs.
The threshold has been frozen since 2010, and was expected to increase to £329,000 in 2015, so this latest announcement is bad news for many families. The threshold would normally increase each year in line with inflation, so freezing it, and for so long, is effectively a tax rise. More families will be drawn into the tax net and the tax bills could end up considerably higher than would have been the case.
Spouses of different domiciles
Transfers from one spouse to another are exempt from inheritance tax – with one notable exception. If you are domiciled or deemed domiciled in the UK and your surviving spouse is not, then the spousal exemption does not apply.
In this case the amount that could be transferred between the spouses was limited to just £55,000 (on top of the usual nil rate band).
This has finally changed, with effect from 6th April 2013.
The £55,000 limit has increased to match the nil rate band, so currently £325,000. The total that can be transferred tax free is therefore now £650,000.
Also, non-UK domiciled individuals married to UK domiciles, or in a civil partnership with one, can now elect to be treated as a UK domicile for inheritance tax purposes. The election enables them to receive the full spousal exemption, so that there is no tax at all between them.
There is a catch to consider. Normally, a non-domicile is only liable to tax on assets situated in the UK. If they opt to be treated as UK domiciled, their worldwide assets will now be taxable.
The election can be backdated to apply from any date within the seven years before the election is made so that lifetime gifts made within that period can benefit from the full spouse exemption even though no election was in place at the time the gifts were made. The earliest date from which an individual can choose the election to take effect is 6 April 2013. In addition, the election can be made within two years of the death of the first spouse, so this allows scope for planning even after the first death. However, once the election is made, it is irrevocable for as long as the surviving spouse remains UK resident. If they do become non-resident for tax purposes, they will continue to be treated as UK domiciled for four full tax years.
You therefore need weigh all the factors to calculate whether you are better off being treated as UK domicile or non-domicile, and investigate any tax planning opportunities. You should seek professional advice on this.
Deductibility of loans
Loans are generally deducible from an estate for inheritance tax purposes, but there are some changes on the way here. These were included in the Budget press releases and will be released as part of the 2013 Finance Bill.
Any outstanding debts at the date of death will be scrutinised by HM Revenue & Customs (HMRC) and heirs to the estate will need to be able to demonstrate that there is a commercial reason, other than that of obtaining a tax advantage, to retaining that debt going forward. Where they cannot demonstrate this, the loan will not be allowed to create a reduction in the value of the estate.
Loans which were taken out to purchase assets that are not subject to inheritance tax will not be deductible either. Furthermore, where a loan has been incurred in order to acquire assets on which a tax relief is due, the loan will be used to reduce the value of those assets only, rather than set off against the whole estate.
UK inheritance tax, and particularly domicile determination, is a very complex matter. Many people leave estate planning until it is too late, or do not appreciate how it affects them, or get their domicile wrong, leaving their heirs with an unexpected tax bill. Professional advice from a specialist firm like Blevins Franks is essential to ensure that you get it right and save tax for family and other heirs where possible.
30 April 2013
The 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 should take personalised advice.