Inheritance Tax For British Expats

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If you are an expat and want to ensure your wealth goes to the people you intend when you die, then you need to understand inheritance tax rules.

You must remember is your place of domicile affects the inheritance tax (IHT) that you pay in the UK.

The rule of thumb is you will pay IHT on your assets in the UK that are not ‘excluded’.

So, it makes sense to spend some time making sure your estate planning ties up with your domicile and tax residence.

In simple terms, domicile is the country where you father had his main home when you were born.

Excluded assets include foreign currency accounts, overseas pensions and some unit trust investments.

Your tax residence determines where you pay tax on income and capital gains.

When expats are UK domiciled

You are UK domiciled if you:

  • Lived in Britain for 15 of the last 20 years
  • Spent the last three years of your life living in Britain

Cross-border Inheritance tax

Governments impose their own inheritance and tax rules on an estate– and most are very different form those in the UK.

If you have assets that you can move, make sure they are pinpointed and are in a place where inheritance rules dictate what happens to them when you die aligns with your wishes.

This may involve some effort ensuring your wealth ends up with those you wish to inherit as the law in different countries can send money and property to someone you do not intend to inherit their wealth.

This means understanding cross-border IHT and estate planning laws.

In the Middle East or North Africa, expat estates are divided under Islamic law, except in Dubai, where expats can opt to make a will under British inheritance rules.

Many European countries – including France and Spain – have legal codes with different inheritance rules to the UK.

Five ways to minimise IHT

Expats can exploit five IHT rules to reduce the amount of tax they pay on their wealth:

Everyone has a personal exemption that lets them make gifts of up to £3,000 a year without fearing the tax man revisiting their friends or families to claw back IHT when they die. If the allowance is unused, it can be carried forward to the next tax year – but an unused allowance expires after two years.

Expats can make other gifts, too:

  • Up to £1,000 as a wedding or civil ceremony gift – rising to £2,500 for grandchildren or £5,000 for great-grandchildren
  • Personal gifts, like Christmas or birthday presents are exempt providing your standard of living is not affected by giving them
  • Helping someone out with living expenses, like an elderly relative or a child under 18 comes IHT-free
  • Gifts to charities and political parties attract no IHT
  • You can give up to £250 to as many people as you, if you do not claim another exemption in the same year for that person
  • Leaving a charity 10% or more of your estate cuts the IHT rate on the rest of the estate from 40% to 36%.
  • Holdings in investments like the Enterprise Investment Scheme and Seed Enterprise Investment Scheme come with Business Property Relief that slashes IHT to 0% if the investment is held for at least two years.
  • Unspent cash in a UK pension or the Qualifying Recognised Overseas Pension Scheme (QROPS) does not attract IHT – although beneficiaries inheriting the cash may have an income tax liability.
  • Trusts are popular estate planning strategies to reduce tax, but they can complicate matters for some expats depending on the legal status of trusts in the country where they live.

The seven-year tax glitch

Any gifts made in the three years prior to your death attract IHT at a rate of 40%.

Between three and seven years, IHT is reduced by ‘taper relief’ and after seven years, any gifts are disregarded as taxable.

Here’s how IHT works out on gifts made between three and seven years from your death:

Years between gift and death Tax paid
Less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Source: HMRC

IHT tax-free limits

Chancellor Philip Hammond has tasked experts to simplify IHT rules, but any changes may take a year or two to work through the system.

The current inheritance tax rates are:

Nil rate band

£325,000

Main residence relief

From To Additional threshold/residence nil rate band
6 April 2020 5 April 2021 £175,000
6 April 2019 5 April 2020 £150,000
6 April 2018 5 April 2019 £125,000
6 April 2017 5 April 2018 £100,000

Source: HMRC

If the main home was downsized or sold to pay care costs, you may leave cash from the sale rather than a property.

Main home relief comes with some other rulesas well that define the property that can be included in your estate as a main home and who you can leave the property to.

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