As an expat embarking upon a new life overseas, it is likely that inheritance tax is far from the forefront of your mind. Finances such as utility bills, accommodation expenses and insurance costs may have been given priority when you began to plan your move, which is particularly understandable if you are an expat trying to juggle your money while embracing a new and exciting lifestyle. However, there is an expat tax that could have an impact on your spouse or children — expat inheritance tax is an important factor to consider when you are managing your finances and should be talked about sooner rather than later.
At ExpatRoute, we want to provide you with as much information as possible about expat inheritance tax. We have put together the following guide in the hope of shedding some light on the way UK inheritance tax laws can impact on UK expats based on residence status, descendants and finances, among other factors. However, if you feel you might need more personalised guidance, we recommend seeking the advice of an independent financial advisor.
What is inheritance tax?
Inheritance tax is based on the value of an estate when its owner passes away. Generally speaking, the greater the value of your assets upon your death, the more inheritance tax will be paid on your estate before any of those assets can be claimed by the beneficiaries named in your will. There are many different criteria that affect the amount of inheritance tax that is paid, including:
- The value of the estate: no inheritance tax is due on an estate that is worth below £325,000
- Who inherits your home: if you choose to gift your home to your children or grandchildren, your inheritance tax threshold will increase to £500,000
- Whether a spouse has already passed away: when a spouse dies with an estate worth under the inheritance tax threshold, any threshold that has been unused can be added to your spouse’s threshold
We traditionally consider inheritance tax as a tax paid after death, but it can also be paid on gifts or trusts made during a person’s life. However, when we are considering the inheritance tax that is paid after death, it is usually paid by the executor of the deceased’s estate using funds taken from the estate itself. Conversely, those with assets in a trust are usually responsible for paying the inheritance tax themselves.
Are expats liable to pay UK inheritance tax?
It is easy to see why many expats may feel as though they are not necessarily required to pay expat inheritance tax. When it comes to general expat tax, there are many factors that influence the amount paid, and the government it is paid to. However, even expats living outside of the UK are expected to pay inheritance tax in Britain under the current tax rules.
According to UK law, if you are a British expat with resident status, you will pay inheritance tax based on the same rules as UK residents who are living at home. These rules state that any estate valued at more than £325,000 will be subject to inheritance tax for any assets over than threshold. It is also the case that non-resident expats are liable to pay the same levels of inheritance tax, although this is not how it works if the expat does not have domicile status in the UK. Where this is the case, the only assets that can be taxed based on UK inheritance laws are those that are based in Britain.
Something that is worth keeping in mind is any UK property that you own. Likely the most expensive of your assets, property can rapidly grow in value in a short space of time and this can have a huge impact on your inheritance tax and the amount you owe. Should your property rise in value and push you beyond the tax-free threshold then you will be forced to pay inheritance tax on that added value.
Changing your domicile
If you are an expat living overseas and you would like to change your domicile to avoid paying expat inheritance tax based on UK laws, there are three main factors that will need to be considered, including where you were born, whether you have assets in the UK and where your father was born. These factors will all help the taxman establish your status based on the three types of domicile that currently exist under English law:
- Domicile of origin: a child takes their father’s domicile of origin (or of a single mother) at birth, and this is not necessarily the country where you are born.
- Domicile of dependence: applies to women who were married before 1974, children and mentally incapable persons.
- Domicile of choice: can be acquired by moving permanently to another country.
Unfortunately, your domicile can only be established by HM Revenue & Customs, so you will have to accept the conclusion that they draw based on this information. When attempting to change your status, you will need to be able to prove that you have no intention of returning to the UK. There are many ways you can try to provide this proof, including:
- Relinquishing your UK passport.
- Cutting all ties with British organisations and joining alternatives in your new country of residence.
- Selling all UK property and purchasing property in your country of residence.
- Closing all UK bank accounts and moving your pension plan overseas.
Changing domicile is a long process, taking at least three years to achieve but significantly longer in some cases. This is based on the fact that you are unable to change your status for expat inheritance tax purposes if you were UK domiciled within the past three years, or UK resident for any part of 17 of the last 20 years. Remember — your UK domicile status will be immediately reinstated if you return to live in the UK, and the process of changing your domicile will have to begin again if you choose to move away once more in the future.
Protecting your assets from inheritance tax
In order to avoid paying inheritance tax you will need to seek independent advice from a professional who can assess your personal finances. However, if you believe your estate may fall within the UK tax threshold — and you are currently considered a UK domicile or resident — then it could be worth taking the time to find a more tax efficient way of managing your finances. This could involve setting up trusts, offering gifts to family members or friends, or transferring your pension pot to an international QROPS pension scheme.
It is also important to remember that you can avoid paying inheritance tax on properties that are passed down to direct descendants. This is a form of relief that is still applicable to expats who are not living within the UK, but it is only available if the property in question is considered your main home. To find out more about whether this relief is applicable to you, speak to an independent financial advisor who will be able to offer you personalised guidance.