Any UK expat residing in a foreign country is often concerned about Inheritance Tax (IHT). Needless to say, UK IHT is a complex phenomenon and traversing it is even more difficult for expats. Many a time, expats are liable for the tax without even realising it. If you are looking for an easy yet comprehensive guide on Inheritance Tax and its implications for the UK, then this article is for you.
What is UK Inheritance Tax?
Simply put, 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 Inheritance Tax. IHT is calculated based on the total estate value and is applicable if the estate exceeds the tax-free threshold, which is currently set at £325,000. The IHT rate beyond this limitation is 40 per cent. However, it is essential to remember that there are exemptions and additional allowances available to mitigate the IHT liability.
According to the lexicon of the IHT, an estate is the collective name given to anything 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
A major exception to the UK Inheritance Tax is a person’s pension. Despite being a type of investment, a pension does not form a part of the taxable estate.
UK Inheritance Tax for Expats - What Is the Connection?
Many UK expats residing in another country wrongly assume that just because they no longer live within the physical boundaries of the United Kingdom, they are not liable for Inheritance Tax. Well, the fact of the matter is that the UK IHT is not determined by your residential status but by your domicile status.
Domicile status is a complex legal concept. In simple words, it is the place you consider your permanent home. The domicile status is different from nationality, citizenship and residential status. Besides, unlike residency and citizenship, you can be domiciled in only one country at a time.
For the UK Inheritance Tax context, you are UK-domiciled if either of the following two conditions apply to your situation:
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
So, if you are deemed UK-domiciled, IHT is an application to your worldwide assets. However, Inheritance tax only applies to your UK assets if you have a non-dom status.
Do You Pay Inheritance Tax in Two Countries?
Most countries have some type of Inheritance Tax in place, although the name can be different. So, yes, you might be liable to pay Inheritance Tax both in the UK and your country of residence. However, the United Kingdom has double taxation agreements with several countries, which protect you from being taxed for the same thing in both nations.
For any UK expat living abroad, navigating the complexities of Inheritance Tax (IHT) can seem daunting. The implications of UK IHT on your estate—regardless of where you currently reside—are significant, and without careful planning, you may find yourself liable for tax charges you hadn't anticipated. Understanding your tax obligations and the potential for double taxation is crucial. If you're seeking clarity and guidance on how to manage your IHT liabilities effectively, our team is here to help. We offer expert advice tailored to your unique situation, ensuring you're well-informed and equipped to make the best decisions for your estate. Contact us to discuss how we can assist you in navigating the intricacies of UK Inheritance Tax, providing peace of mind for you and your loved ones.