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UK Inheritance Tax: What You Need to Know

UK Inheritance Tax: What You Need to Know

In this article, we will explore the concept of UK inheritance tax and why it is important to understand. Whether you are a UK resident or planning to move to the UK, knowing the implications of this tax can help you make informed financial decisions.

What is UK Domicile and why does it matter?

According to HMRC’s definition, UK domicile refers to the status of being a UK resident for inheritance tax purposes. Before April 6th, 2017, an individual was considered UK domiciled if they resided in the UK for 17 out of 20 years. However, after this date, the requirement changed to 15 out of 20 years.

If you meet the domicile criteria, you may be liable to pay UK inheritance tax on your worldwide assets, so if you are planning to move to the UK, it is crucial to seek tax advice to understand the potential implications and explore strategies to minimize your tax liability.

It’s important to note that if you have always lived in the UK and hold UK passports, you are already considered domiciled and your worldwide assets are subject to UK inheritance tax.

There are strategies available to potentially mitigate this tax, some of which we will discuss later in this blog.

Understanding UK Worldwide Inheritance Tax

Under UK law, inheritance tax must be paid within six months of death. The standard rate is 40%.

Transfers between married couples, civil partners, or registered same-sex couples are exempt from inheritance tax. However, if assets are transferred to children or other individuals, or both partners have passed away, inheritance tax may apply.

There are two key allowances to consider.

We each have a tax-free inheritance tax allowance of £325,000 – known as the nil-rate band. The allowance has remained the same since 2010-11.

The standard inheritance tax rate is 40% of anything in your estate over the £325,000 threshold. For example, if you leave behind an estate worth £500,000, the tax bill will be £70,000 (40% on £175,000 – the difference between £500,000 and £325,000).

On top of the main IHT allowance, there is an additional main residence allowance that came into effect in April 2017, which means people can leave significantly more if the estate includes a property being left to direct descendants (children, grandchildren, and stepchildren, but not nieces or nephews).

The main residence nil-rate band is an extra property allowance that allows people to leave their homes to family tax-free. In April 2020, it increased to £175,000, and is set until 2026. This effectively raises the IHT-free allowance to £500,000 for most people.

Inheritance Tax can add up to a substantial tax payment, emphasising the importance of effective tax planning.

Foreigners moving to the UK need to exercise caution, especially if they plan to return to their home country in the future. An illustrative case is the Amar vs. HMRC, where an individual born in India but residing in the UK for most of their life passed away in India. Despite some conflicting information on the Domicile form, the tribunal concluded that the individual had not abandoned their UK domicile, subjecting their entire worldwide estate to UK inheritance tax.

This case highlights the potential complexities involved in determining domicile status and the importance of seeking professional tax advice.

Strategies to Minimise UK Inheritance Tax

If you wish to minimise your UK inheritance tax liability, consider the following options:

  • Leave the UK to avoid being subject to UK inheritance tax on your worldwide assets.
  • Place worldwide assets into trust before domiciling in the UK.
  • Document all relevant actions and intentions. If you plan to move to another country, ensure you have written evidence supporting your decision.
  • Create a will in the country you are relocating to. Clearly state your burial preferences and ensure that your will aligns with your desired tax planning strategy.
  • Make gifts during your lifetime, such as transferring assets to your children or utilising trusts. By reducing the value of your estate, you can potentially lower your inheritance tax liability.
  • Utilise limited companies with freezing growth shares. This approach can provide additional tax planning opportunities.

While these strategies can be effective, it is crucial to consult with a knowledgeable tax planner who can guide you through the complexities of international tax planning and help you navigate the process of moving countries.

By understanding the requirements and taking appropriate steps, you can potentially mitigate the burden of inheritance tax and protect your assets for future generations.

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