Expats Face New IHT Tax Grab


The British government is stepping up a tax grab than could cost expats who own homes in the UK up to 40% of the value of their investment.

Even a modest property investment of £250,000 – the price of an average home in the UK – could trigger an unforeseen tax bill of £100,000 when a new register of overseas property owners goes live later this year.

For investors in London and the South-East, where the average home price is £515,000, the tax bill will hit £206,000.

Bid To Stop Dirty Money Nets Expat Home Owners

The Department for Business, Energy and Industrial Strategy is compiling a register of overseas owners of UK property. 

The database is designed to capture details of British expats and overseas nationals buying homes in the UK to stop money laundering and tax avoidance.

The National Crime Agency says luxury homes, especially in and around London, are a target for crooks to launder their dirty money.

“The high amounts of money that can be moved in one transaction and the appreciation in value, along with the enhanced lifestyle, makes them very attractive to criminals,” said a recent study looking at money laundering and funding terrorism by the Treasury and Home Office.

The potential problem is huge – 97,000 homes in England and Wales are owned by companies registered offshore. Half the homes worth an estimated £33.9 billion are in London.

Although prime property prices in London are languishing in a 13-year low, 57% of the homes sold in 2020 were to overseas buyers.

IHT Windfall For Treasury Coffers

The property register will immediately expose expats and overseas owners to costly inheritance tax (IHT) bills when they die.

Specialist adviser John Lamb Hill Oldridge explains that before the ink dries on sales contracts, the new property owner is liable for IHT regardless of where they are resident for tax, their nationality, domicile or if they hold the property as individuals or through a company.

The IHT liability for London property is a £13.6 billion for the Treasury.

For example. A home worth £10 million bought in 2010 is now valued at around £16.7 million, which could incur an IHT bill of £6.7 million on the owner’s death, wiping out any investment gain.

No Hiding Place Offshore

Offshore companies intended as a tax-effective method of holding homes in the UK are no longer a solution for many owners. UK company tax rules changed in April 2017 for close companies – those with five or less shareholders.

The change brought the value of shares and property loans within the scope of IHT, including the sale of any shares up to two years after the disposal.

Making Plans To Cover The Bill

There’s no point living in hope that HM Revenue & Customs in the UK will remain unaware of the death of a property owner on the database, so it’s prudent to make a financial plan to deal with the bill.

Gifting a home to children or loved ones is not away round the tax either, as if you die within seven years of making the gift, IHT is still due on a tapered scale.

Taper relief reduces the tax payable, not the value of the gift.

IHT taper relief rates

Years between gift and deathIHT rate 
Less than 340%
3 to 432%
4 to 524%
5 to 616%
6 to 78%
More than 70%
Source: HMRC

Insurance solution to IHT 

A simple solution to the IHT problem for expats is to take out life assurance that pays out enough on death to cover any tax bill for the estate.

The policy can either cover the potential IHT bill to the estate of the tax due over seven years if the property is gifted.

How IHT Works 

For high net worth expats and overseas investors with prime UK property, the IHT reliefs and allowances that can cover the first £1 million of an estate are hardly worthwhile.

But property owners with estates worth around the £1 million mark can benefit considerably.

IHT is only paid on an estate worth more than £325,000 – but this can be doubled up to £650,000 for a married couple passing property to each other and stretched to £1 million with the main residence nil rate band.

Main residence nil rate band

The main residence nil rate band can increase the tax-free amount by another £350,000 to £1 million providing the family home qualifies for the relief.

The allowance is £175,000 for 2020-21, which again doubles up to £350,000 if unused when the first spouse dies.

But the property must go to a direct descendant, like a child or grandchild.

There’s a catch for the wealthy – if the estate is worth more than £2 million, the main residence nil rate band shrinks by £1 for every £2 the estate is valued above the threshold and evaporates at £2.4 million.

The trouble with gifting

Gifts have got to be with no strings attached, otherwise they are not true gifts.

You can’t give a loved one a home and say you will live there rent-free until you die because under IHT rules, you are still in control of the asset, so it can’t be a gift.

Expats Face New IHT Tax Grab FAQ

IHT is a wealth tax levied from someone’s estate when they die.

For owners who live outside the UK, whether they are expats or foreign nationals, IHT is only due on assets in the UK.

For a clearer explanation of IHT on overseas owned homes, here are some answers to the most asked questions from expats.

Who pays inheritance tax?

IHT on UK property is generally paid within six months of a death by the deceased person’s estate before the remaining assets are distributed to beneficiaries.
However, if IHT may also be due on gifts made within seven years of the date of death. The person receiving the gift generally pays the ta in this case.

Do non-residents pay UK IHT?

Yes, non-residents must pay tax on their UK assets when they die. IHT is not a residence based tax, but one based on domicile. Moving abroad and changing tax residence does not mean domicile automatically changes unless you can show you intend to leave the UK permanently.

Will I pay IHT in my new country as well as the UK?

Possibly, depending on the tax rules in place in the UK and your new home. However, double taxation treaties are designed to remove this double jeopardy.

How do I minimise the amount of IHT I pay?

The best way is to speak to estate planning specialists in the UK, the country you call home and any other country where you have assets like property. They should draft a strategy to make sure your plans do not contradict and that the people you want to inherit receive the bequests you wish to leave them.

What’s the taper limit if my estate is worth more than £2m?

First, if your estate is worth more than £2m, the taper limit only applies to the main residence nil rate band.
If you are relying on the main residence relief to bequest your family home, once your estate reaches £2.4 million, you lose the benefit of the relief.

Below is a list of some related articles, guides and insights that you may find of interest.

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