The UK Inheritance Tax is the tax levied on the estate of a deceased person. The UK IHT is applicable on estates that exceed the tax-free threshold of £325,000. The current IHT rate is 40 percent but thankfully some exemptions and allowances can help a UK expat mitigate their IHT liability. Interested to know more? Read ahead!
Top 2 Strategies to Reduce the Potential Inheritance Tax Liabilities for UK Expats
Exemptions
If all the wealth over the Inheritance Tax threshold is left to the spouse or civil partner of the deceased person, then no tax is due. Moreover, the IHT threshold can be as high as £1 million per couple if the family home is left to a child, foster child, stepchild or grandchild, provided that the deceased person’s estate is less valuable than the Inheritance Tax allowance and any remaining allowance can be added to the allowance of their spouse or civil partner. Likewise, if all assets above the Inheritance tax threshold are left to a charity of a local amateur sports team, then no IHT is due.
Change Your Domicile Status
If you own the UK-domiciled status, then all your worldwide assets are liable to UK Inheritance Tax.
The UK government recognises the domicile status based on three contexts:
Domicile of Origin - A Child takes their father or single mother’s domicile of origin, which is not necessarily the country where the child is born
Domicile of Dependence - It applies to women married before 1974, children and mentally incapable individuals
Domicile of Choice - It can obtained by permanently relocating to another country
One way to avoid Inheritance Tax as a UK expat is to change your domicile status to another country. To establish a new domicile of choice, you must be physically present in the new country, be a tax resident of the new country and stay there permanently with no plans to return to the United Kingdom. Even mentioning in your will that you want to be buried in the UK will be counterproductive. The key is to cut as many ties with the United Kingdom as possible.
For exemption and mitigation of the UK IHT, it takes at least three years to change your domicile status. If you were a UK resident for any portion of the 15 of the previous 20 tax years or if you were a UK resident in the previous three years, then you will be deemed a UK resident for Inheritance Tax purposes.
It is essential to remember that changing the domicile status to avoid UK IHT is incredibly challenging, as the latter is a significant source of income for the UK government. The key is to prove that you have no intention of returning to the United Kingdom to alter your domicile tax status. Some methods that might facilitate the process are:
Severing ties with all social organisations of the UK and joining new ones in your country of residence
Relinquishing your British passport
Sell all your UK-based properties and purchase real estate in your country of residence
Closing all your UK bank accounts
Navigating the landscape of UK Inheritance Tax (IHT) can be particularly challenging for UK expats, with its potential to impact your financial planning and the legacy you wish to leave behind. If the prospect of mitigating your IHT liabilities seems daunting, you're not alone. Understanding the exemptions, allowances, and strategies such as changing your domicile status can offer significant relief, yet the intricacies involved require expert guidance. Our team specialises in providing bespoke advice to UK expats, helping demystify IHT and tailor strategies that align with your personal circumstances and goals. Whether you're aiming to optimise exemptions or considering a domicile change, we're here to assist every step of the way. Reach out to us for a consultation, and let's explore how we can help reduce your Inheritance Tax liabilities, ensuring your peace of mind and the security of your loved ones.