A Beginner’s Guide to Inheritance Tax for UK Expats

Any UK expat living abroad has good reason to think carefully about Inheritance Tax (IHT). UK IHT is a genuinely complicated area, and expats often find themselves liable without ever realising it. If you want a straightforward guide to Inheritance Tax and what it means for you as a UK expat, read on.

What is UK Inheritance Tax?

UK Inheritance Tax is a tax levied on the estate of a deceased person. In 2021, the UK taxman collected more than £5.7 billion from IHT alone. It’s calculated on the total estate value and kicks in once the estate exceeds £325,000, the current tax-free threshold. Beyond that point, the rate is 40 per cent. There are, however, exemptions and additional allowances that can reduce what’s owed.

According to the lexicon of IHT, an estate is the collective name for everything you own. It can include:

• Money held in a bank or building society

• Physical cash

• Property or other possessions, such as jewellery

• Money paid out on a life insurance policy

• Investments such as stocks and shares

One major exception is a person’s pension. Despite being a form of investment, a pension doesn’t form part of the taxable estate.

UK Inheritance Tax for Expats – What Is the Connection?

Many UK expats living abroad wrongly assume that because they no longer live within the UK’s borders, they’re not liable for Inheritance Tax. In fact, UK IHT isn’t determined by your residential status but by your domicile status.

Domicile is a legal concept, and not always an intuitive one. Put simply, it’s the country you consider your permanent home. It differs from nationality, citizenship, and residential status, and unlike those, you can only be domiciled in one country at a time.

For UK Inheritance Tax purposes, you’re considered UK-domiciled if either of the following applies:

• The United Kingdom has been your country of residence for 15 of the last 20 years

• You have had your permanent home in the United Kingdom at any time for the last years of your life

If you’re deemed UK-domiciled, IHT applies to your worldwide assets. If you hold non-dom status, Inheritance Tax applies only to your UK assets.

Do You Pay Inheritance Tax in Two Countries?

Most countries have some form of Inheritance Tax in place, even if it goes by a different name. So yes, you might be liable in both the UK and your country of residence. That said, the United Kingdom has double taxation agreements with several countries, which can protect you from being taxed on the same assets twice.

For any UK expat living abroad, the implications of UK IHT on your estate can be significant, and without careful planning, you may face tax charges you hadn’t anticipated. If you’d like clarity on your obligations and how to manage your IHT liabilities, our team is here to help. We offer expert advice tailored to your situation, so you can make informed decisions about your estate. Contact us to discuss how we can assist you with UK Inheritance Tax and give you and your loved ones peace of mind.