Inheritance tax (IHT) is a tax levied on the transfer of assets and properties upon an individual’s death in the United Kingdom. It is worth knowing the details of IHT to effectively plan for the future and minimise its impact on your estate.
This article will provide a comprehensive overview of UK inheritance tax, its current regulations, exemptions, and reliefs. Additionally, we will explore specific planning strategies for UK expats to ensure a smooth transfer of assets while reducing the tax burden on beneficiaries.
What is Inheritance Tax?
Inheritance tax is a tax imposed on the value of a deceased individual’s estate above a certain threshold. As of September 2021, the standard threshold, known as the nil-rate band, was set at £325,000 per person. This means that any assets above this threshold would be subject to inheritance tax at a fixed rate of 40%.
Inheritance Tax Rates and Exemptions
In the UK, inheritance tax is typically charged at 40% on the portion of the estate exceeding the nil-rate band. However, certain exemptions and reliefs are available to reduce the tax liability:
- Spouse/Civil Partner Exemption: Transfers between spouses or civil partners are generally exempt. The unused nil-rate band of the first spouse to die can also be transferred to the surviving spouse, effectively doubling the available tax-free allowance.
- Nil-Rate Band Gifts: Gifts made to individuals or charities during the deceased’s lifetime might also be exempt if they fall within the annual exemption (currently £3,000) or certain other gift allowances.
- Business Property Relief (BPR): BPR can provide relief or reduce the taxable value of certain business assets, making it possible to pass on a family business without incurring a significant tax bill.
- Agricultural Property Relief (APR): Similar to BPR, APR allows for tax relief on agricultural property, including farmland and buildings used for farming purposes.
Inheritance Tax for UK Expats
UK inheritance tax rules can be complex for expats, and careful planning is necessary to ensure their assets are distributed according to their wishes while minimising tax implications. An expat’s domicile status plays a crucial role in determining their tax liability.
- Domicile Status: Inheritance tax is primarily determined by domicile status, which is not necessarily the same as residence. UK domiciles are generally subject to this tax on their worldwide assets, while non-UK domiciles are only subject to tax on their UK-based assets.
- Statutory Residence Test: The Statutory Residence Test helps determine an individual’s UK tax residency status, taking into account factors like days spent in the UK and connections to the country. UK expats need to be mindful of their tax residency to manage their inheritance tax obligations effectively.
Planning Strategies for UK Expats
UK expats can adopt several planning strategies to mitigate inheritance tax:
Strategy 1: Lifetime Gifting
Making gifts during one’s lifetime can help reduce the value of the estate subject to inheritance tax. Utilising the annual exemption and other gift allowances can be a practical way to pass on assets tax-efficiently.
Strategy 2: Offshore Trusts
For non-UK domiciles, offshore trusts can offer effective estate planning solutions, as assets held within such trusts are usually not subject to UK tax.
Strategy 3: Relocation of Assets
Depending on individual circumstances, relocating assets to countries with more favourable inheritance tax regimes might be beneficial. However, this should be done with careful consideration of the tax implications in both jurisdictions.
Strategy 4: Life Insurance
Taking out life insurance policies written in trust can provide beneficiaries with a tax-free lump sum, which can help cover liabilities.
Ready to find out more?
UK inheritance tax is a significant consideration for individuals looking to pass on their wealth to their heirs. Understanding the rules, exemptions, and planning strategies is crucial to minimise the impact on your estate.
For UK expats, additional complexities arise due to domicile status and tax residency, necessitating careful planning to ensure a smooth transfer of assets and financial security for loved ones.
Seeking professional advice from tax and estate planning experts is highly recommended to tailor strategies that align with individual circumstances and objectives.
