Five things you may not realise about UK inheritance tax
As inheritance tax revenue continues to soar for the UK Treasury year-by-year, it seems more families are getting caught in the net. For expatriates, it can be especially difficult to know where you stand with UK inheritance tax. With rates at 40%, it pays to understand your position and what you can do to minimise exposure for your heirs.
1. You could still be UK-domiciled
Even after many years of living abroad, you could still be considered UK-domiciled, bringing you into the firing line for inheritance tax. This could be the case, for example, if you still hold UK assets or show intentions to return one day.
While it is possible to adopt a domicile of choice in Spain by severing all ties with the UK, domicile law is extremely complex and you need to keep up-to-date with changing rules. For the best outcome here, seek specialist, personalised guidance.
2. It affects UK assets and potentially your worldwide estate
For UK domiciles, UK inheritance tax applies to your worldwide estate.
Even if you are not UK-domiciled, any British assets attract UK inheritance tax, now including UK residential property owned through a corporate structure (‘enveloped’).
3. A new relief was recently introduced…
Previously the only available inheritance tax relief was a £325,000 nil-rate band (£650,000 for couples). But since April 2017, the ‘residential nil-rate band’ or ‘family home allowance’ has provided extra relief when passing on a main home to direct descendants.
Starting at £100,000, the tax-free threshold rises each year until it reaches £175,000 in 2020/21. It will then track inflation. As with the standard allowance, you can transfer any unused balance to your spouse/civil partner, making a total potential threshold for a couple of £1 million by 2020/21.
4. …but it has limitations
To be eligible for the allowance, the property must be recognised as your main home – you must have lived in it at some point. It is only available on one property that is passed directly to children or grandchildren. Homes owned indirectly through certain trusts, for example, may not qualify.
Estates worth over £2 million have a lower threshold, and those valued over £2.25 million (in the 2018/19 tax year) are not eligible at all. Note that your entire estate is counted here, not just property.
5. Your home could tip you over the threshold
Residential property accounts for more than a third of a typical estate liable for inheritance tax. As house prices have risen, so has the number of estates that fall outside the tax-free thresholds – and the amount payable. If, for example, combined assets exceed the £2.4 million value threshold for the property relief in 2020/21, the £175,000 allowance could be replaced by a £70,000 inheritance tax bill.
Additionally, the standard relief – frozen at £325,000 since 2009 – has not kept pace with inflation in the way that the value of property or other assets has.
However, there are ways to mitigate UK inheritance tax. Expatriates can use Spanish-compliant investment structures or trust arrangements, for example, or acquire a domicile of choice overseas. An adviser with specialist, cross-border expertise can help you establish your domicile status and how UK inheritance tax interacts with Spanish gift and succession tax. With good estate planning, you can structure your wealth to take advantage of all reliefs available and ensure your legacy ends up in the right hands without leaving your heirs an unnecessarily large tax bill.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.