UK inheritance tax and domicile – what you need to know today

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UK inheritance tax

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

UK inheritance tax follows you around the world since it’s based on domicile, not residence. You could live abroad long term and still be liable for this legacy tax. Here, we look at key facts about UK inheritance tax and how it could affect your intended heirs.   

Data released by HM Revenue & Customs (HMRC) in October reveals that it received a record £3.5 billion in inheritance tax (IHT) receipts for the first six months of the 2022/23 tax year. The previous record was £3.1 billion in the same period last year. This continues the upward trend seen over the last 10 years.

The Office for Budget Responsibility predicts that the average IHT bill could reach £266,000 for the current tax year.

Over the April 2021 to 2022 financial year, annual IHT receipts totalled £6.1 billion – the first time it went over £6 billion.  This was a 14% increase from the £5.4 billion collected the previous year. These figures are expected to keep growing, especially with tax thresholds frozen until 2026 and house prices climbing.  In fact, the Office for Budget Responsibility (OBR) forecasts that HMRC will earn around £37 billion from IHT over the next five years.   More and more families will get caught in the inheritance tax net and the amount they’ll pay will increase too.

It is therefore definitely worth taking a little time now to review your inheritance tax situation and take steps to reduce this unwelcome tax liability for your family and heirs.  Make sure your estate planning is set up to make the most of the available exemptions and allowances, as well as the tax planning opportunities to reduce or eliminate your liabilities.  Don’t rely on IHT planning set up years ago; you need to review your estate planning regularly to ensure it is up to date and remains on track to achieve your wishes.

Please don’t hesitate to contact us to review your inheritance tax exposure and your estate planning, particularly to confirm if it’s suitable for a UK national living in your particular country of residence.

Key facts about UK inheritance tax

  • UK IHT is charged when assets are transferred to someone else, usually on death but also potentially on lifetime gifts.
  • It is calculated and charged on your worldwide estate. This includes all property you own including your home; bank accounts; investments; insurance policies not in trust; household contents; jewellery; vehicles etc. Outstanding mortgages and loans are deducted from the total.
  • Being tax resident in countries like Spain, Portugal and Malta does not exempt your estate from this tax (France is a little different, see below). Your estate is liable for as long as you remain a UK domicile – and many British expatriates are UK domiciled their whole life. Domicile is a complex and adhesive UK common law concept. The basic rule is that a person is domiciled in the country in which they have their permanent home – the country regarded as your ‘homeland’. For example, HMRC could deem you a UK domicile if you intend to be buried there.
  • 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. Note that you cannot ask HMRC for a ruling on your domicile status, it will only be established on your death. So, you need specialist domicile determination advice – a service Blevins Franks has been offering for decades, giving us a wealth of experience.
  • Assets situated in the UK are always liable to UK IHT, regardless of domicile.
  • The IHT tax rate is a flat 40% (reduced to 36% if at least 10% of the estate is left to charity).
  • Transfers to spouses and civil partners are exempt from UK inheritance tax provided you are both UK domiciled. If one of you is domiciled outside the UK, their exemption is limited to the nil rate band.
  • The standard inheritance tax nil rate band (or threshold/allowance) is £325,000. Any unused amount on the first death can be transferred to your spouse/civil partner, potentially giving your joint estate an allowance of up to £650,000 on the second death.
  • In addition, the ‘residential nil-rate band’ (RNRB) can provide an extra £175,000 allowance for a property that is, or has been, your main home (but only on one property). It applies to homes outside the UK too. But there are limitations. It is only available if you leave the property directly to children or grandchildren (so be careful with trusts). Also, the threshold is reduced for estates valued at over £2 million. At this point, it starts tapering off until it’s eliminated completely – currently for estates valued over £2.4m (this is the whole estate, not just property).
  • While the thresholds are meant to rise with inflation, the 2021 UK budget froze both these thresholds until at least April 2026. The main £325,000 allowance has in fact been frozen for 13 years, since 2009, resulting in more families paying more tax – freezing allowances can have the same effect as cutting them.
  • If you are tax resident in Spain you are also liable to Spanish succession and gift tax, which is additionally levied on worldwide assets. However, you/your heirs receive a credit in Spain for any inheritance tax paid in the UK on the same assets.
  • If you are tax resident in France and a habitual resident there, then the France/UK double tax treaty on inheritances states that your assets are only liable to French succession tax and are not also taxable in the UK. This however excludes assets located in the UK, but you will receive a credit in France for tax paid in the UK on the same assets.

We would be happy to review your inheritance and estate planning to confirm it is on the right track to meet your wishes for your family and heirs. We can analyse your inheritance tax liability and recommend solutions to reduce your exposure as much as possible.

We can also talk you through the local succession law, and the inheritance and probate process in your country of residence. This can help you take immediate steps to ensure your estate is divided according to your wishes, and in a way that makes life easier for your beneficiaries.

Contact Blevins Franks today.

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.

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