UK inheritance tax continues to impact British expatriates since it is based on domicile rather than residence. UK Prime Minister David Cameron has indicated that he would like to increase the £325,000 threshold to £1 million next year.
UK inheritance tax continues to impact British expatriates and their families, since it is based on domicile rather than residence. It is chargeable on worldwide assets, with a “nil rate band” of £325,000. UK Prime Minister David Cameron has indicated that he would like to increase this threshold to £1 million next year.
The current threshold has been frozen at £325,000 (potentially £650,000 for a married couple or civil partners, if the transferrable nil rate band is available in full) since 2009. Under previous budgets it is scheduled to remain unchanged until 2017/18.
If it were to increase, it would be welcome news for British domiciles, wherever they live. It would also benefit non-UK domiciles with UK assets worth over £325,000. Assets valued at less than £1 million (possibly £2 million for spouses/civil partners) would escape this unpopular tax entirely.
It could also benefit those setting up trusts, as more will be able to be gifted to trusts. In addition, it would affect the nil rate band of all trusts, making fewer trusts liable to the decennial and exit charges. Since there is likely to be only one nil rate band to be shared between all trusts from next April, this would give more scope to those who would like to set up multiple trusts.
With a fixed rate of 40%, inheritance tax provides a useful income for the Treasury. HM Revenue & Customs (HMRC) figures from July show that earnings had increased to £3.4 billion, a six year high, compared to £3.1 billion the previous 12 months.
The Office for Budget Responsibility has also predicted that the number of estates paying inheritance tax will double by 2018-19. The Treasury is expecting to earn £5.8 billion by then.
If the exchequer loses up to £3 billion in inheritance tax receipts, we have to wonder how this will be paid for. The revenue is used to fund government expenditure, and it is not in a position to lose such vital income.
Mr Cameron raised the prospect of increasing the threshold while speaking at the Age UK’s London office in October, where he said:
“To me inheritance tax is a tax that should be paid by the very wealthy. I think you should be able to pass a family home on to your children rather than leave it to the taxman.”
He added that he would try and “shoehorn” the measure into George Osborne’s next Budget.
His comments have been widely reported, but there is no guarantee it will happen.
The Conservative Party had proposed the same measure before the last general election. It won them support, but was dropped when they formed a coalition with the Liberal Democrats.
If it does get included in the March budget, a new government could announce a second budget where measures are reversed or amended.
In any case, Mr Cameron admitted that he had his “work cut out on this one”, though the Chancellor George Osborne was keen on it too. They would have to think carefully before proceeding, since Mr Osborne is meant to be working to eliminate the structural budget deficit, and may have to explain how it would be funded.
On 21st November The Telegraph reported that tax receipts are weak and the government’s ability to reduce the deficit and Britain’s huge debts remains in doubt.
The deficit is £3.7 billion (6%) higher in 2014 than it was in 2013. While the Office for Budget Responsibility had forecast a 7% increase in income tax receipts in 2014, they are down 0.4% compared with the same period last year.
This makes it much harder for the Chancellor to offer any big tax giveaways.
Inheritance tax planning should be a key part of your tax and wealth management planning, if you wish to pass wealth down to the next generations to help your children and grandchildren as they make their way through life. Expatriates need to be clear on their domicile position, and plan accordingly. Expert advice is vital here since this is a complex area and easy to get wrong.
Besides UK inheritance tax, you need to consider any local death taxes like succession tax in Spain or stamp duty in Portugal.
You also need to consider the arrangements you use for holding your wealth, to establish what would work best for your aims. Some are more easily transferrable to beneficiaries than others; for example you may be able to avoid probate on your investment capital.
Estate planning is a complex area, more so for expatriates, and can be a legislative minefield. Specialist, detailed advice is essential.
24 November 2014
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.