Different countries have their own rules about how they tax someone’s wealth when they die.This guide explains how UK IHT rules for expats and offers tips on reducing the tax bill.
Table of contents
- What is Inheritance Tax?
- Where do expats pay inheritance taxes?
- IHT in popular expat destinations
- Expat domicile and IHT
- Does a home outside the UK qualify for IHT relief?
- Can expats give away their home without paying tax?
- IHT rates for gifts worth more than £325,000
- Inheritance Tax for expats FAQ
- Related Articles, Guides and Insights
- Questions or Comments?
Some, like the UK, have some form of wealth or inheritance tax, while many others levy no taxes on a dead person’s estate.
Finding out how your wealth is tax-treated on death is important as the rules will impact your finances and the standard of living of your loved ones if you are with a partner or have a family.
What is Inheritance Tax?
Inheritance Tax in Britain is the tax paid on the wealth an expat leaves behind when they die.
Someone’s total wealth liable to IHT is called their estate, which is the net worth of their property, savings and possessions after deducting any debts.
In the UK:
- The nil-rate threshold for an individual is £325,000. The value of an estate exceeding this amount is taxed at 40% unless passed to a spouse or civil partner, when no tax is charged on the entire value regardless of the amount
- Expats leaving their main home can boost the nil-rate band to £500,000 with the residence nil-rate band, but this only applies to property left to children or grandchildren.
- If the surviving spouse inherits from a partner who has not used their IHT allowances and reliefs, their nil-rate band doubles, and they can pass on an estate worth up to £1 million without paying IHT.
Where do expats pay inheritance taxes?
The latest data from the Organisation of Economic Co-operation and Development (OECD) says 24 member countries have IHT or an estate tax:
|IHT or gift tax
|Belgium*, Chile, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovenia, Spain, Switzerland*, Turkey
|Estate tax and gift tax
|Denmark, UK, USA
|Gifts taxed as income
|Repealed IHT or estate taxes
|Australia, Austria, Canada, Czech Republic, Israel, Mexico, New Zealand, Norway, Slovakia, Sweden
IHT in popular expat destinations
Australia is home to the most British expats, with 1.4 million living mainly along the east coast between Brisbane, Sydney and Melbourne. This is because Australia has no inheritance or wealth taxes.
Living in Spain is the next favourite with an expat population of 761,000 Brits. IHT is charged against an estate according to the number of beneficiaries and their relationship with the deceased.
The USA (678,000 British expats) and Canada (600,000 British expats) are in third and fourth place in the rankings. IHT is between 18% and 40% in the USA, but the threshold to start paying tax can be as much as $11.2 million for an individual.
In Canada, spouses inherit free of IHT, but other beneficiaries may pay income or capital gains taxes on their inheritances.
Interested in which country is the most popular, then make sure to read our article about the top 10 European expat destinations.
Expat domicile and IHT
Domicile is the link an individual has with a country – and domicile extends to how that country tax treats their estate on death.
Everyone has a ‘domicile of origin’ at birth.
They can elect a ‘domicile of choice’ when they reach 16 years old, which they can change several times throughout their lifetime.
‘Deemed domicile’ can apply to UK expats who meet two tests:
- Test A is met if someone is born in the UK, has the UK as their domicile of origin and lived in the UK from 2017 to 2018 or later tax years.
- Test B applies to someone who has lived in the UK for 15 out of the previous 20 tax years
‘Domicile of dependency’ may apply to married women with a spouse with UK domicile.
Does a home outside the UK qualify for IHT relief?
Yes. A main home outside the UK can qualify for IHT relief or even be excluded from an estate, depending on where you are domiciled at the time you pass on.
The IHT residence nil rate band allows someone who has UK domicile to claim extra tax relief on their estate. The relief is worth £175,000 for individuals or £350,000 for married couples.
The allowance only applies to an estate passed to a direct descendant – in the case of IHT, this means a child or grandchild and includes step, foster and adopted children.
If the value of the family home bumps up the estate to more than £2 million, the residence nil rate band tapers off by £1 for every £2 the estate is above the threshold and disappears when the estate value hits £2.4 million.
Can expats give away their home without paying tax?
This is where expats need professional advice to navigate a complicated area of tax.
Some gifts might attract capital gains tax (CGT) on the disposal for the donor and IHT on the donor’s death for the person receiving the gift.
Gifting means giving ownership away with no strings attached. It’s no good trying to beat IHT by handing your home over to a relative or loved one on the condition you can live there rent-free until your death or move into long-term care.
HM Revenue & Customs will still consider you the owner and include the property in your estate when you pass on.
This makes the gift a potentially exempt transfer (PET), which means potential IHT tapers off if you die within seven years of making the gift.
Any gifts worth less than £325,000 (the nil rate band) are added back to your estate to give an adjusted net worth, while a gift of more than £325,000 wipes out the nil rate band and the excess is taxed.
Gifts to a spouse or civil partner do not attract IHT or CGT.
IHT rates for gifts worth more than £325,000
|Time between the date of gift and date of donor’s death
|The effective rate charged on gift
|More than 7 years
Although the gift may avoid IHT in the future when the donor passes on, the gift may trigger CGT during their lifetime.
If you gift the home you live in, there should be no CGT charge, but there is probably tax to pay if the home is a buy to let or holiday let.
Another point to remember is the seven-year taper for IHT on gifts or lifetime transfers does not apply to the residence nil-rate band.
Inheritance Tax for expats FAQ
Estate planning, including IHT issues, is a complex tax area for expats.
Expats with property, money or investments in more than one country should seek professional estate planning advice in both places to make sure they do not pay unnecessary taxes.
Questions are regularly raised about gifting, passing on the family home, and unspent pension cash. Here are the answers to some of the most-asked questions:
Inheritance Tax (IHT) is not about where you live and pay your taxes but where your assets, like property, cash and investments, are as well.
You may live abroad for many years but still, have a CGT liability on a home you own in the UK.
The estate pays IHT before distributing the assets. Therefore, anyone receiving a bequest should already have had IHT deducted, but they may have to pay capital gains tax if they sell the asset.
No. Any assets left to a spouse or civil partner are free from IHT, although they may be capital gains tax if they sell or give away the asset.
The latest HMRC figures apply to the 2019-20 tax year.
The data shows £5.2 billion was collected from the estates of 24,200 individuals.
The residence nil rate band was claimed by 20,200 estates that sheltered homes worth £3.1 billion from IHT.
Around 4% of estates pay IHT in the UK.
Possibly, depending on the tax treatment of an estate where you now live. However, double taxation rules mean expats do not face paying tax twice on the same assets.
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