Unlike other taxes, UK Inheritance Tax (IHT) follows you around the world, regardless of where you may reside. This is because it is based on domicile, not residence, and it can be harder than you realise to shake off your British domicile status. Many British expatriates remain liable to IHT even if they have lived abroad for many years.
The nil-rate band for IHT has been a controversial issue for some time. The 1997-2007 property price boom catapulted many more families into the IHT net but calls to increase the threshold in line with property prices instead of inflation were ignored. It has been calculated that if the threshold had risen with property prices since 1997 it would have reached £560,000. Instead it is £325,000.
While the threshold normally increases each year, it has been frozen at £325,000 since April 2009. This year’s March budget confirmed it will not improve until April 2015. It also confirmed that from 2015 it will continue to rise in line with inflation, but it will now measured by the Consumer Price Index (CPI) and not the Retail Price Index (RPI) as previously.
The CPI is generally lower than the RPI so this is in effect a subtle tax rise. When the move was first announced in the 2011 budget, the Sunday Times calculated that linking to the RPI as usual would mean the nil rate band increases to £393,000 within 10 years, but under the new CPI system it could only increase to £373,000. After 40 years the difference could be as much as £211,000.
Last year’s budget included a proposal to reduce an individual’s inheritance tax rate from 40% to 36% if they leave at least 10% of their estate to qualifying charities. This has now been confirmed and applies for deaths on or after April 6 2012.
Transfers to non-UK domicile spouses
The March 2012 budget included some good news for UK domiciles married to non-UK domiciles.
In the UK, there is no inheritance tax for assets passing between spouses and civil partners – the ‘spouse exemption’. This only applies, however, where both spouses/partners are UK domiciles or both are non-UK domiciles. The problem arises where a UK domicile dies and leaves assets to a spouse/partner who is not a UK domicile. In this case, only £55,000 can be transferred tax free, with the balance fully taxable as part of the estate at 40%. This £55,000 allowance has not changed since capital transfer tax became inheritance tax in 1982, when it was the nil rate band applying from March 1982.
The chancellor has now announced plans to increase the £55,000 allowance to match the current nil rate band of £325,000. There will be a technical consultation and legislation for the new rate should be included in the 2013 Finance Bill, to apply from April 2013.
There is also a proposal to allow individuals who are not UK domiciled but married to one to elect to be UK domiciled for IHT purposes so they can claim the full spouse exemption. However, this will expose their worldwide assets to UK inheritance tax, so this should be considered carefully.
Inheritance tax on undeclared assets held in Switzerland
The UK has just signed a protocol of amendment to its existing tax agreement with Switzerland. From next January, Swiss financial institutions will apply a withholding tax on all earnings from undeclared funds held by UK residents and deduct a retrospective tax to previously unpaid tax. The revised agreement has now been extended to include inheritance tax. The beneficiaries of an account which has not been declared to HMRC will have to choose between having 40% of the funds deducted or disclosing them to the UK authorities.
Last year accountancy firm UHY Hacker Young revealed that HMRC had launched almost 10,000 investigations into IHT valuations and had been actively targeting estates and beneficiaries. These investigations into property valuations yielded an extra £70 million in tax for the taxman. On average, beneficiaries had to fork out £24,600 extra.
If HMRC establishes that a property has been undervalued for IHT purposes because “reasonable care” was not taken to report the correct value, it can fine beneficiaries up to 100% of the additional tax liability.
Inheritance tax is often called a ‘voluntary tax’ because there are various steps that can usually be taken to avoid it or lower the liability for your heirs. HMRC is getting stricter, however, with ‘aggressive’ arrangements which are set up just to avoid IHT, so it is important to take professional advice. If you are an expatriate and have no intention of ever returning to live in the UK, it is possible that you have established a ‘domicile of choice’ outside the UK and so are no longer liable for this tax, but again you do need to take advice from an advisory firm like Blevins Franks which has years of experience in determining domicile. If you get it wrong and your worldwide assets amount to more than the threshold, your heirs could be faced with a large unexpected tax bill.
The tax rates, scope and relief 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; an individual must take personalised advice.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranks.com