CURRENTLY, AROUND 1.5 million households are liable to UK inheritance tax (IHT), which could triple by 2020. In the decade between 1999 and 2009, around two million more estates will have become liable to IHT. The 2006/7 nil-rate band is 285,000 pounds sterling, over which people will have to pay tax at 40 per cent on all worldwide assets.
With house prices having risen at an alarming rate, IHT is no longer just a tax on the landed gentry, but also a tax on the homes of the common people. In fact, Halifax research finds the less affluent households are being hit harder than the wealthy. This research, based on recently released data from HM Revenue & Customs, shows that the total number of estates paying IHT rose by 72 per cent over the five years to 2003/4. The UK government’s own estimates suggest that the number of estates paying this tax will rise by a further 22 per cent by the end of the tax year 2006/7.
This year, IHT is expected to earn the UK government 3.6 billion pounds sterling, an increase of 51 per cent on the 2002/3 tax year, which brought in 2.35 billion pounds sterling. By 2020, the Treasury could be netting 5.5 billion pounds sterling a year, a 244 per cent increase on the 1.6 billion pounds sterling it received in 1996/7. No wonder Chancellor of the Exchequer, Gordon Brown, has been described as a “taxing machine”.
Unless you take action to avoid it, you, or rather your heirs – likely to be your children or grandchildren – will have to pay tax on everything you own at the time of your death, which is over the nilrate threshold, due to rise to 300,000 pounds sterling next year. If the threshold had risen in line with house prices and not inflation, as it has done, the amount at which people could inherit, tax free, would be almost 550,000 pounds sterling.
Don’t be misled into believing that because you have moved to Portugal, or indeed have lived abroad for some years, that this does not affect you. It hardly matters where you are resident; you will have to pay IHT if you are a UK domicile. If you are not a UK domicile, you will still be liable for IHT on all UK assets belonging to your estate.
In the UK, on the death of a spouse, his or her assets pass to the surviving spouse, exempt from IHT. This tax free transfer right does not extend to either common-law partners or non-domiciled spouses. Careful planning is needed to avoid UK IHT and falling victim to foreign succession laws and tax.
To prove that you are not a UK domicile is a complex undertaking and HMRC will usually only let you know whether it considers you are not UK domicile when IHT is due. Usually, HMRC will impose IHT on anyone it deems to be UK domicile.
If you live in Portugal, the first steps to take to becoming a UK non-domicile is to cut all connections with the UK for at least three years and remove your assets from the UK as far as possible. Ideally, this means closing UK bank accounts, investments, selling your property, resigning from directorships and club memberships, and informing your doctor and dentist that you have moved abroad. In a nutshell, you need to have done everything possible to show that you have emigrated permanently and intend to die in your new country of residence.
In order to become a domicile of Portugal, you need to be a permanent resident, registered for tax and be able to provide evidence for the reasons why you feel you have shed UK domicile status. Even then, around 80 per cent of British expatriates return home to the UK before they die, instantly making them UK domicile again.
If the Labour Government remains in power, the IHT liability is unlikely to get any better. Indeed, with Gordon Brown now taxing just about anything he can think of, it is likely to get worse. He could exempt main homes entirely, lower or tier the tax rate or abolish it completely; but these are all very unlikely. He might raise the threshold in line with house price rises, but he might instead raise the tax rate – not long ago it was recommended by a government think-tank to increase this tax to 50 per cent – and with this chancellor’s record for collecting tax, it seems likely this will happen.
The above is all the more reason to seek professional advice to mitigate your inheritance tax liabilities or to get rid of it altogether. There are various ways this can be accomplished, for instance, by having a nil-rate clause inserted into your Wills so that, on the first death in a marriage, assets to the value of the current nil-rate band can be passed to other beneficiaries.
Offshore Trusts and other established tax planning devices can also help avoid inheritance taxes, forced heirship laws and mitigate certain other taxes. An offshore discretionary Trust also allows you to change beneficiaries as you wish. Almost any kind of asset can be included in a Trust, which will pass to your beneficiaries, without the complication of probate.
Early planning and expert professional advice is needed to make sure that you don’t leave your children a huge tax bill and the Treasury an unnecessary cash bonus!
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