Posted on: 20th October 2022 in Financial Planning
One of the biggest tax concerns for UK expats living in the UAE is Inheritance Tax (IHT).
UK IHT is a complex topic, and even more so for expats. Some may be liable for the tax and not even realise it.
In this article, we look at the IHT implications for expats and methods for reducing your tax bill through inheritance tax planning and sound financial advice.
Inheritance Tax (IHT) is the tax you pay on the estate of someone who has died.
Your estate is the collective name given to everything you own. An estate can be made up of things such as:
The current IHT nil-rate band allowance is £325,000 . So, if the value of your estate is below the Inheritance Tax threshold, you will not pay IHT.
>The standard Inheritance Tax rate of 40% for estates over that threshold applies. You should note that IHT is only charged on the part of your estate’s value that exceeds the £325,000 threshold.
For example, if your estate is worth £1 million, IHT would be 40% of £625,000.
It’s a common misconception that if you no longer live in the UK, you will no longer be liable for Inheritance Tax in the UK.
However, IHT is not determined by your residence status but by your domicile status.
Domicile is a complex legal concept. It is different from citizenship, residence status and nationality. In general, it is the place that you consider your permanent home.
Unlike residency and citizenship , you can only be domiciled in one country at a time.
For Inheritance Tax purposes, HMRC deems you as UK domiciled if either of the following applies:
Your domicile status is important as it affects the scope of IHT. For those deemed as UK-domiciled, IHT is applied to worldwide assets. Meanwhile, IHT only applies to UK assets if you have non-dom status.
The government introduced special rules for foreign nationals who own UK property or other UK-based assets.
Previously, these were treated as foreign assets. Therefore, UK IHT did not apply. Now, the scope of UK IHT applies to these assets.
Most countries have some form of IHT, although it may go by a different name. Depending on your personal circumstance, tax may be payable in both the UK and your country of residence.
>However, the UK has double taxation agreements in place with a large number of countries. These agreements protect you from being taxed on the same thing in both countries.
The UK government’s guide to double tax agreements in relation to IHT provides a more detailed breakdown.
For those living in the UAE, it is highly unlikely that you will face being taxed in both countries. While the UAE does have IHT laws, they have undergone changes in recent years.
Now, the laws of your home country govern your estate rather than your country of residence. In this case, British expats would have their estate dealt with under UK law.
Seeking professional advice about Inheritance Tax is key to protecting your assets.
There are certain situations where your estate is exempt from IHT. For example, if you leave your entire estate to a spouse/civil partner or a charity.
Where IHT is due, there are strategies you can implement as part of your wider estate planning to reduce your Inheritance Tax exposure.
Changing your domicile tax status is one way, but this is very complex and requires careful consideration. Two of the more common methods are gifts and trusts.
You do not pay IHT on gifts of any size you give while still alive.
These are fully completely outside your estate for inheritance tax purposes as long as:
If you pass away within seven years, the gift amount will be added to your estate but may benefit from tax relief known as taper relief.
This means you pay a reduced amount, depending on how many years have elapsed between making the gift and passing away.
The seven-year rule does not apply to smaller gifts. In a given tax year, you can give up to £3,000 worth of gifts. You can split this amount between as many people as you like.
Any unused portion of your allowance will roll over to the following tax year. Be aware that you can only carry over any unused allowance for one tax year.
Separate exemptions apply to wedding gifts. Wedding gifts up to £1,000 are not added to your IHT bill.
You can give more to lineal descendants such as children and grandchildren as follows:
When you put assets into a trust , depending on the type of trust, they no longer belong to you. Therefore, their value won’t be added to your estate or IHT bill when you die.
It’s a common misconception that a trust allows you to bypass IHT altogether. The truth is, it all depends on the type of trust, so careful planning is crucial.
In general, the main situations when IHT is due on trusts are:
Bare trusts are the most straightforward and exempt from IHT in most cases, provided you live for seven years after making the transfer.
Discretionary trusts are often used for IHT planning. These trusts allow you to remove assets from your estate while maintaining control over them.
IHT applies to discretionary trusts as follows:
Some trusts allow you to transfer property. For those with UK-based properties, it is possible to convert them to non-UK assets and place them in a trust, providing it supports property transfer.
Be aware that trusts are complex, and seeking specialist advice is recommended. With the help of our expert advice, you can be sure that you have the right product based on your needs.
Inheritance Tax planning is an essential part of your broader financial planning strategy.
Proper planning is essential to ensure you are as tax-efficient as possible and to establish your inheritance tax liability.
This is even more important for expats, who typically deal with cross-border tax rules. These rules are often complex, but Holborn can help.
Holborn Assets are one of the leading names in the financial services space, specialising in the expat market.
For over 20 years, we have provided high-quality financial advice to expats based on their individual circumstances. Our tailored advice can help you ensure you pass on what you intended to your loved ones.
To find out how we can help you with your tax planning needs, contact us using the form below.
Do expats pay Inheritance Tax in the UK?
Your liability for IHT in the UK is based on your domicile status.
For UK-domiciled individuals, IHT applies to worldwide assets. For those not UK-domiciled, IHT only applies to UK-based assets. You should seek sound financial and legal advice to determine your Inheritance Tax Liability.
Are foreign assets subject to UK Inheritance Tax?
Those classed as UK-domiciled are liable for UK Inheritance Tax on worldwide assets. Some relief may be available for certain assets, such as business relief.
How do I protect my assets from Inheritance Tax?
There are various methods used to protect assets from potential Inheritance Tax. Two of the most common include gifting and setting up a trust.
Do I need to declare Inheritance Tax from overseas?
UK IHT is payable if:
You will need to report foreign assets to HMRC using IHT417 with form IHT400 .
How does HMRC know if I own a property abroad?
HMRC is cracking down on tax owed on offshore assets. They have ways of gathering information to determine if you own a property abroad. However, the methods used by HMRC are not widely disclosed.
Do you pay inheritance tax on money from abroad?
If the deceased was domiciled in the UK when they died, UK IHT is applied to the worldwide assets. This means money from abroad would still be subject to UK IHT.
Does a trust avoid Inheritance Tax?
This all depends on the type of trust. It’s a common misconception that all trusts allow you to bypass IHT.
Bare trusts are exempt from IHT in most cases, provided you live for seven years after making the transfer.
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