As a British expat, inheritance tax planning is an important consideration to ensure that your assets are passed on to your loved ones with minimal tax liabilities. Inheritance tax is a complex issue, and it is important to understand the options available to reduce your tax liabilities. This article will discuss some of the ways that British expats can reduce their tax liabilities through inheritance planning.
Firstly, it is important to understand the current inheritance tax laws in the UK. Currently, UK residents are subject to inheritance tax on their worldwide assets. The inheritance tax rate is 40% on estates valued over £325,000.
However, for British expats, the rules are slightly different. If you are a British expat and have not been a UK resident for at least five years, you will only be subject to inheritance tax on your UK assets. This means that if you have assets outside the UK, you may be able to reduce your inheritance tax liability.
One way to reduce your inheritance tax liability is to make use of the annual gift allowance. In the UK, you are allowed to give away up to £3,000 per year without it being subject to inheritance tax. You can also make small gifts of up to £250 to as many people as you like each year. This can be a useful way to pass on wealth to your loved ones while reducing your inheritance tax liability.
Another option is to make use of trusts. Trusts can be a useful tool for inheritance planning as they allow you to pass on assets while still retaining some control over them. There are various types of trusts available, and the most appropriate one for you will depend on your individual circumstances. However, trusts can be complex, and it is important to seek professional advice before setting one up.
How can British expats use trusts to mitigate UK tax?
British expats can use trusts to mitigate UK tax in a number of ways, depending on their individual circumstances. Trusts can be a useful tool for inheritance tax planning as they allow assets to be passed on to beneficiaries while still retaining some control over them. Here are some ways that trusts can be used to mitigate UK tax for British expats:
Non-UK Resident Trusts: Non-UK resident trusts are trusts that are not domiciled in the UK. If a British expat places their assets into a non-UK resident trust, they may be able to reduce UK inheritance tax liability. This is because assets held within such trusts are not subject to UK inheritance tax unless they are UK assets, such as UK property or investments.
Offshore Trusts: Offshore trusts can also be used to mitigate UK tax for British expats. These are trusts that are established in a country other than the UK. Assets held within offshore trusts may be exempt from UK inheritance tax, as long as the trust is not domiciled in the UK and the assets held within it are not UK assets.
Discretionary Trusts: Discretionary trusts are trusts in which the beneficiaries do not have an absolute entitlement to the trust assets. Instead, the trustees have the discretion to decide how the assets are distributed. These trusts can be useful for British expats who want to pass on assets to their beneficiaries without incurring a large inheritance tax bill. This is because the value of the assets held within a discretionary trust is not usually included in the estate of the settlor (i.e. the person who set up the trust) for inheritance tax purposes.
Interest in Possession Trusts: Interest in possession trusts are trusts in which the beneficiaries have a right to the income generated by the trust assets. These trusts can be useful for British expats who want to pass on income-generating assets to their beneficiaries. The value of the assets held within an interest in possession trust is included in the estate of the settlor for inheritance tax purposes, but only the value of the interest in possession is included in the estate of the beneficiary when they pass away.
Inheritance tax planning conclusions
It is worth noting that trusts can be complex, and there are a number of tax implications that need to be considered when setting up a trust. It is therefore important to seek professional advice before setting up a trust to ensure that it is structured in the most tax-efficient way for your individual circumstances.
If you own property outside the UK, it may be possible to mitigate UK inheritance tax by placing the property into an overseas trust. This can be a complex process, and you should seek professional advice before making any decisions.
Finally, it is worth considering the use of life insurance to cover any inheritance tax liabilities. If you are concerned about the impact of inheritance tax on your estate, you can take out a life insurance policy that is specifically designed to cover any tax liabilities.
In conclusion, inheritance tax planning is an important consideration for British expats. By understanding the current inheritance tax laws and the options available, it is possible to reduce your tax liabilities and ensure that your assets are passed on to your loved ones with minimal fuss.
Whether you choose to make use of the annual gift allowance, trusts or life insurance, it is important to seek professional advice to ensure that you make the best decisions for your individual circumstances.
