UK Inheritance Tax – 9 key points for non-UK individuals

01/06/2020

By David Snelling

Benjamin Franklin once famously said: “In this world nothing can be said to be certain, except death and taxes”. It is as nearly true today as it was in 1789 (we’ll come on to that later).

A great illustration of both these ‘certainties’ is the United Kingdom’s Inheritance Tax – a tax levied upon death. Read on to help avoid common pitfalls and to find out important and relevant facts about Inheritance Tax.

This article is mainly focused on non-UK domiciled individuals to provide useful information regarding Inheritance Tax. If this is you and you are interested to learn more about Inheritance Tax (and saving Inheritance Tax), please read on:

  1. Inheritance Tax is complicated
    It is usually levied at 40%. However, this can be reduced to 36% if you gift 10% of your estate to charity. There are two Inheritance Tax free ‘Nil Rate Bands’ meaning an estate may be able to pay no Inheritance Tax if it is valued up to £500,000. If you would like to read more about UK Inheritance Tax, please download our guide.
  2. In some respects, it is a voluntary tax
    Your estate cannot get away without paying Her Majesty’s Revenue and Customs (HMRC) what is due. However, you can plan throughout your life to ensure that your wealth is not subject to Inheritance Tax when the certainty of death finally comes. For example, assume a widow’s estate liable to Inheritance Tax is £2.5 million (after all reliefs and Nil Rate Bands are deducted). In this simple example, the Inheritance Tax due would be a substantial sum of up to £1 million. However, with prior Inheritance Tax planning, it would have been possible to save the estate the entire £1 million.
  3. Whilst domicile is an important factor when it comes to Inheritance Tax, all individuals in the world may be subject to UK Inheritance Tax
    One example of this is UK residential property. Whether owned directly or indirectly through an offshore company, UK residential property is subject to Inheritance Tax, regardless of the owner’s domicile. To understand more about the concept of domicile, read our guide.
  4. Non-UK domiciled individuals only have to pay UK Inheritance Tax on their UK assets
    There is some interesting tax planning available to UK resident (or soon to be UK resident) non-UK domiciles. If you are in this situation, you should seek expert advice – ideally before moving to the UK or as soon as possible once in the UK.
  5. UK non-domiciled individuals can be ‘deemed’ domicile for Inheritance Tax purposes
    HMRC will deem everyone domiciled in the UK if they have lived in the UK for 15 years out of the last 20 years. However, the rules are different if you’re a ‘formally domiciled resident’ i.e. if you were previously born in the UK and the UK is your domicile of origin (but you have since acquired a new domicile of choice). In these circumstances, you’ll automatically be deemed domiciled if you are now UK resident and were also a UK resident in at least one of the previous two tax years.
  6. You can break a ‘deemed’ domicile status
    You will have to cease being a UK resident and have at least six tax years of non-UK residence in the last 20 tax years prior to the relevant year before this occurs. Alternatively, this also occurs by not being a UK resident for the last four tax years ending with the relevant year. These apply if you became a deemed domicile due to long residence in the UK.
  7. You can never change your domicile of origin – that will always stay the same
    You can however change your domicile of choice, although you must be very careful how you do this. If successful, you will still be treated as a ‘deemed’ UK domicile for three years after you left the UK and changed your domicile of choice.
  8. Your spouse/civil partner can be your best friend, but not always
    For a UK domiciled person gifting to their UK domiciled spouse or civil partner, any gifts or transfers to a spouse or civil partner, in life and death, are exempt from Inheritance Tax. However, issues can arise for non-UK domiciled individuals. For example, issues arise if a non-UK domiciled person has a domiciled or ‘deemed’ domiciled spouse/civil partner who passes away before them. This is an issue as they will not be entitled to this ‘spousal’ exemption as they are a non-UK domicile. Early planning may be undertaken to avoid issues if you or your spouse are ever likely to become UK domiciled or UK deemed domiciled.
  9. Some UK business and agricultural assets are partly or fully outside the remit of Inheritance Tax as long as they have been held for at least two years
    This includes shares in some AIM-listed companies, which can attract Business Relief (BR), which can make them very efficient investments for Inheritance Tax planning. For example, you purchase shares in a BR-qualifying investment and hold these for two years. When you pass away, these shares (assuming they’re still BR-qualifying) will be outside your estate for IHT, saving a potential fortune in Inheritance Tax!

The UK Inheritance Tax regime is complicated – notoriously so. However, with proper planning and expert guidance, you can navigate this minefield successfully. Your loved ones will thank you for it!

If you are a non-UK resident and are interested in tax planning before entering the UK or before becoming UK domiciled please see our article: 10 considerations for pre-UK residency planning.

For more information regarding UK Inheritance Tax and any related matters, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

 

Note – This article does not constitute financial advice and you should always consult a qualified financial professional before undertaking any financial planning. The information in this article is based solely on our understanding as at the date of the article. Government legislation can change at any time.

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