The 2022/23 tax year proved to be yet another record year for UK inheritance tax (IHT) receipts. This is expected to keep growing, so what can you do to protect your family and heirs from this death tax? Since liability is generally based on domicile or situs of asset rather than residence, this is a UK tax that continues to affect British expatriates.
HM Revenue & Customs (HMRC) received an extra £1 billion over the last tax year, generating a total of £7.1 billion. And the number of people paying this unpopular tax jumped 24%, up from 33,000 the previous year to 41,000.
The government expects IHT revenue to continue to increase, bringing in £38 billion over the next five years.
Frozen reliefs and rising property prices
The standard inheritance tax nil rate band has been frozen at £325,000 since 2009. It is scheduled to remain fixed until April 2028, by which time it would have been frozen for 19 years.
In contrast, house prices have, of course, risen over this long period, pushing more estates into the IHT net. Other assets will also have increased in value over the years, and more and more families are now paying a tax that was once designed to only hit the wealthy.
The residential nil-rate band was introduced in 2017 to help protect families, but it has its limitations. Starting at £100,000, it increased to £175,000 in 2020/21 but is now also frozen until 2028.
Any unused nil band is transferable to a spouse on death. When the £175,000 residential nil rate band is combined with the standard £325,000 allowance, couples today can potentially pass on up to £1 million tax-free, or £500,000 for individuals.
Note, however, that the residential nil rate band only applies to a main home that is passed to children and grandchildren, and where the estate is valued under £2 million. Higher value estates are subject to a tapering system that eliminates the residential nil rate band entirely when an estate exceeds £2.35 million.
Is your estate liable for UK inheritance tax?
UK inheritance tax is charged on death and lifetime gifts. If you are a UK domicile, it applies to your worldwide estate, regardless of where you and the recipients are resident. Non-UK domiciles are only assessed on UK situated assets.
Your liability is calculated on your entire estate – all property, savings and investments, insurance policies not in trust, household contents, jewellery, vehicles etc. Outstanding mortgages and loans are generally deducted from the total.
If the total value of your estate is lower than the two allowances (£325,000 + £175,000 for the main home), then your heirs do not have to pay this tax. If your estate exceeds the thresholds, your heirs pay 40% tax on the excess. Where the allowances are not used on the first death, or only partly used, the balance can be transferred to the surviving spouse/civil partner – so make sure your estate is set up to take full advantage of this.
Expatriates and the domicile issue
UK inheritance tax follows you around the world since your estate is liable for as long as you remain a UK domicile. Domicile is a complex and adhesive UK common law concept, and many British expatriates are UK domiciled their whole life.
That said, you can take steps and cut ties with the UK to adopt a domicile of choice in Portugal, though it can take up to four years to shed a UK domicile for inheritance tax purposes. Getting your domicile status wrong could result in an unexpected large tax bill for your family, so professional advice is essential here.
UK inheritance tax planning
Inheritance tax is often referred to as a voluntary tax, since there are various steps you can take to eliminate or reduce the liability for your family and heirs. Don’t risk leaving it too late, especially if you are planning on making lifetime gifts (‘potentially exempt transfers’).
Cross-border estate planning can be a minefield – more so if you are subject to inheritance taxes in more than one country – so take specialist advice today to get it right and take advantage of the planning opportunities available.
The 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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com
 received an extra £1 billion over the last tax year, generating a total of £7.1 billion.){kind=link}