As inheritance tax revenue continues to soar for the UK Treasury year-by-year, it seems more families are getting caught in the net. The UK government collected a record high of over £5.2 billion in 2017/18 – 8% more than the year before.
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 Portugal by severing all ties with the UK, domicile law is extremely complex. Also, new rules could mean that returning to the UK for a relatively short period – say, due to family illness – could reignite inheritance tax liability for non-domiciles. 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, not just UK assets and not just property.
Even if you are not UK-domiciled, any British assets attract UK inheritance tax. This now includes all UK residential property. Before April 5, 2017, property owned through a corporate structure (‘enveloped’) was generally exempt, so if you hold UK residential property in this way, explore your options for the most tax-efficient way forward.
3. A new relief was recently introduced …
Between 2009 and last year, 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. The good news for expatriates is you can claim this allowance on a property outside the UK, provided it is your main home (although local inheritance taxes may still apply).
Starting at £100,000, the tax-free threshold increased to £125,000 this April and will continue to rise until it reaches £175,000 in 2020/21. From then on, it is due to 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; as you must have lived in it at some point, this excludes most investment properties. It is only available on one property that is passed directly to children or grandchildren, so homes owned indirectly through certain trusts, for example, may not qualify.
Also, larger estates will not receive full relief – 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 – including savings and investments, certain trusts, pay-outs from life insurance policies, pension lump sums from the death of a spouse/partner, cars, furniture and personal belongings such as jewellery.
5. Your home could tip you over the threshold
Despite the new allowance, the government’s inheritance tax coffers continue to swell in large part due to the increasing value of assets – particularly property. Now, 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 and fixed until 2021 – has not kept pace with inflation in the way that the value of property or other assets has. The UK government’s Office for Budget Responsibility predicts the inheritance tax haul will exceed £6.4 billion by 2022/23 as asset growth continues.
However, there are ways to mitigate UK inheritance tax other than gradually transferring (or spending!) your wealth within your lifetime. Expatriates can use Portuguese-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 Portuguese stamp duty. 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 bil
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.
By Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.