Inheritance tax affects expats living outside of the UK whose domicile remains inside the UK. It also affects people with non-domicile status in the UK who have assets that are based in the UK.
Your country of domicile is determined by a number of factors, including where you were born, where your father was born, and where you own assets. Changing your domicile can be a difficult process, and is not simply a case of proving that you no longer reside in the UK. The UK tax system requires proof that you do not intend to return to the UK, and an experienced financial adviser will be able to guide you through ways to prove this, such as relinquishing your passport.
There are also ways to protect your assets from inheritance tax, such as the payment of gifts and the transferring of pensions, so it’s important to bear this in mind when planning your taxes.
What is inheritance tax?
Inheritance tax is a tax that is levied on inherited wealth, including money, property, and personal possessions. This combination of all of the wealth of an individual is usually referred to as an ‘estate’. Inheritance tax is levied upon the death of an individual, according to where they have bequeathed their estate and how much has been bequeathed to each beneficiary.
In the UK this tax is paid by the estate of the deceased individual (administered by the executor of the will, if there is one, or the administrator of the estate if there is not) and the remaining assets are distributed to the beneficiaries. In some countries the system is different, such as the French succession tax system where the beneficiaries receive the full inheritance and are required to pay any tax on it themselves.
How much is inheritance tax?
In the UK, inheritance tax is levied on all inherited wealth above a threshold that is currently set at £325,000. This is also called the inheritance tax allowance. The allowance rises to £500,000 if the individual that died owned, or part owned, their home and if they have bequeathed it their own child, foster child, stepchild, or grandchild. UK inheritance tax is levied at a rate of 40 per cent, with some modifications and exceptions.
What are the different inheritance tax rates?
As previously mentioned, the basic rate of UK inheritance tax is 40 per cent.
This rate tapers off gradually for any gifts given within the seven-year period before an individual’s death — the criteria for these gifts are explained in the exceptions section of this page.
The individual taper rates for gifts are as follows:
|Period of time between gift and death||Tax rate|
|Less than 3 years||40%|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 or more years||0%|
In addition to this, if more than 10 per cent of an individual’s estate is left to charity then the remaining estate is taxed at 36 per cent, rather than 40 per cent. This can often mean a lower financial obligation, overall, than not donating to charity at all.
What are the inheritance tax exemptions?
No inheritance tax is payable if all wealth above the inheritance tax allowance is left to an individual’s spouse or civil partner. In addition, if an individual dies and their estate is worth less than the inheritance tax allowance, any remaining allowance can be added to their spouse or civil partner’s allowance, making the maximum possible threshold £1 million per couple if the family home is bequeathed to a child, foster child, stepchild or grandchild.
No inheritance tax is payable if all wealth above the inheritance tax allowance is bequeathed to a charity or community amateur sports club.
As previously mentioned, the inheritance tax allowance increases to £500,000 if you leave your home to your child, foster child, stepchild, or grandchild.
A gift of up to any amount may be made to an individual’s family, tax free, so long as the person bequeathing the gift lives at least seven years beyond the date that the gift was given. In the event of the individual dying before those seven years are up, inheritance tax may be charged to the beneficiary of the gift. A gift made in this way is referred to as a Potentially Exempt Transfer, and if the individual who made the gift dies before the seven-year period has expires it becomes a Chargeable Transfer.
Every individual in the UK has what is known as an annual gift allowance, which means that up to £3,000 worth of assets or cash can be given away each year without being considered for inheritance tax. Any excess, unused annual gift allowance can be carried over to the subsequent tax year, but this only happens once: if it is not used in the following tax year then it is lost.
Some gifts are exempt from being included in the annual gift allowance, allowing them to be gifted without inheritance tax at any time. This includes any gift worth £250 or less (to an individual who has not already received a gift from your annual gift allowance).
Wedding gifts are also exempt, up to the following amounts:
Given to one’s own child: up to £5,000
Given to a grandchild or great-grandchild: up to £2,500
Given to any other relative or friend: up to £1,000
Gifts to help pay for the cost of living of an ex-spouse, an elderly relative or a child under 18 who is in full time education may also be exempt from the annual gift allowance, depending on circumstance.
Gifts to a charity or community amateur sports club are exempt from the annual gift allowance, as they are from inheritance tax. Gifts to a political party may also be exempt.
Also exempt from the annual gift allowance, in certain circumstances, are gifts from surplus income, which is to say income beyond that required to maintain your usual standard of living. This can include regular payments into a child’s savings account or other regular payments such as life insurance premiums for your spouse or civil partner. This is a complex area with complex rules, so it’s important that you keep a detailed record of these payments (which must be regular) if you intend to take advantage of this particular mechanism. As always, it’s best to consult a qualified professional if at all unsure.
What are the inheritance tax limits?
As laid out previously on this page, the threshold for inheritance tax in the UK is set at £325,000, and this can increase to a potential of £1 million per couple depending on circumstance. Other countries have different thresholds, but most will have at least some amount of inheritance that can be passed on inheritance tax-free.
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