The ExpatRoute team is here to help you make sense of inheritance tax and how much you may need to pay as a British expat.
Inheritance tax for British expats is a complex financial levy and one which can be challenging to work out as an expat enjoying life abroad. Many British expats are under the illusion that expat inheritance tax does not apply to them but, in the majority of cases, this is incorrect.
Not only are the rules surrounding inheritance tax difficult to understand but it can also end up being a large outgoing for Brits. Recent figures showed that the highest ever total amount of inheritance tax was paid to HMRC in 2017-2018 with a bill of £5.4bn.
The average inheritance tax bill is now estimated to be around £200,000 and this figure is only expected to rise in the future.
It therefore makes good financial sense to dig deeper into inheritance tax and any potential responsibilities around it. Any expats living abroad need to find out if it applies to them and, if it does, the best ways to potentially reduce this levy on your would-be beneficiaries after you have gone.
What is inheritance tax?
Inheritance tax is a tax paid on an estate left by someone who has died. Estate means the total value of the person’s possessions, property or car.
As someone enjoying an expat lifestyle, you might think you will be exempt from inheritance tax as you are living abroad and your monthly income is not taxed by HMRC.
However, if you are deemed to be a UK domicile, even if you are enjoying life abroad, you will still be subject to inheritance tax after your death.
Why do expats need to pay inheritance tax?
Anyone who lives and works abroad without paying UK taxes is likely to be considered as a UK domicile but “non-resident” by HMRC. This means inheritance tax will still be applied to an expat in the event of their death.
Domicile is a legal concept. You will generally be domiciled in the country where you consider your ‘roots’ are, or the country where you have your permanent home. In this way it is different to nationality, citizenship or residence.
According to the authorities, “if you or your father were born or raised in Britain, then you’re likely to be deemed domiciled in Britain”.
What do you pay?
The amount of inheritance tax a beneficiary will need to pay depends on the value of the estate they inherit. This money will be taken from your estate by the executors.
In some instances, no inheritance tax will be levied.
• If the estate is worth less than £325,000
• If everything over the £325,000 threshold is left to a partner or charity
However, if HMRC view you as a UK domicile and your estate is valued at more than £325,000, this estate will be subject to inheritance tax of 40%.
If a couple are married or in a civil partnership, then this threshold stands at £650,000. This applies as long as the executors of an estate transfer a partner’s unused inheritance tax threshold to their other half when they pass away.
As an expat living abroad, if your domicile is still classed as the UK, your estate will be liable for inheritance tax if its value passes £325,000.
How to avoid paying inheritance tax as a Brit living abroad?
Brits living abroad as expats can explore different options to either avoid paying inheritance tax or at least reduce the amount that might be levied on their estate.
Changing your country of domicile
This is perhaps the most difficult and complicated way of avoiding inheritance tax as it involves demonstrating to HMRC that you have cut all ties with the UK and have no intention of returning.
It can be complicated. To do this you will have to:
• Give up your UK passport
• Sell any UK property and purchase property in the country you are calling home
• Shut any UK bank accounts
If you take this option, then it will be at least three years until the UK domicile status is shed. This connection to the UK will also be reinstated if you return at any point or leave your new domicile to visit a different country.
If you do not want to go through the legal wranglings around domicile status, then there are other ways you can plan ahead to reduce the amount of inheritance tax on your estate.
Resident nil-rate band
The Resident nil-rate band is an extra property allowance that lets people leave their main homes to close family members tax-free.
Under the rules, if you’re passing your home to a direct descendant, you can benefit from an additional £175,000 in tax-free allowance in the 2020-21 tax year. This is increased from the £150,000 allowance seen in 2019-20.
You have a £3,000 gift allowance available each year which is called an annual exemption. You are therefore able to give away cash or assets worth this sum every tax year without it being added to the value of an estate. Any part of this exemption which is not used can be carried over to the following tax year.
It is also worth noting that you can give as many gifts up to £250 to as many individuals as you want as long as they have not received a £3,000 gift.
Money can be given as wedding presents to avoid incurring any inheritance tax too. These have to be:
• given to a child and worth £5,000 or less
• given to a grandchild or great-grandchild and worth £2,500 or less
• given to another relative or friend and worth £1,000 or less
Other gifts to pay the living costs of an ex-spouse, a child under 18 or other dependent could also be exempt from being taxed.
Donate money to charity
Any cash or physical assets you leave to a charity either while you are still alive or in your will will be exempt from inheritance tax. This exemption has been put in place to encourage people to leave money to good causes.
Potentially exempt transfers
A potentially exempt transfer allows an individual to make gifts of unlimited value. These gifts will be exempt from inheritance tax if the benefactor survives for a period of seven years. If the gifter does not live for this period, then the gift goes back to the estate and could be taxed.
Pay money into a trust or pension
You can pay money or assets into trusts which are protected from inheritance tax. You can also leave money in a pension for any beneficiaries. If you die before the age of 75, then the funds can be accessed without any income tax charges too.
Choosing the best ways to prepare for your loved ones after you’ve gone can be a daunting and challenging task. However, ExpatRoute is on hand to provide you with the information you need to effectively reduce any added costs incurred by your estate.
Contact a financial adviser today to get started with your inheritance tax requirements.