Many expats are unaware that they could have to pay UK inheritance tax if they have a UK domicile. Although very few people are liable to pay inheritance tax in the UK, timely inheritance planning can help in avoiding inheritance tax.
Table of Content:
What is Inheritance Tax?
Inheritance tax is a tax that is levied on the estate of a deceased person. The amount of inheritance tax that is payable depends on the value of the estate and the measures taken for avoiding inheritance tax during inheritance planning.
In order to be liable for inheritance tax, the deceased must have been domiciled in the UK at the time of their death. This means that they must have had their main home in the UK, even if they were not a British citizen. If the deceased was not domiciled in the UK, then inheritance tax will only be payable on the assets in the UK.
If you are an expat living in the UK, it is important to be aware of these rules as you may be liable for inheritance tax on your UK estate even if you are not a British citizen.
If you are planning to leave the UK and move abroad, you should take advice from a qualified advisor on how this will affect your liability for inheritance tax.
Types of Domicile
There are three types of domicile in the UK: Ordinary domicile of origin, Acquired domicile of choice and Domicile of dependency.
Ordinary Domicile: Ordinary domicile of origin is the domicile you are born with, which is normally your father’s country of citizenship. This can be changed by acquiring a new nationality or becoming stateless.
Acquired Domicile: Acquired domicile of choice is when you live in a country for a significant period of time and it becomes your permanent home. This usually happens when you move to a new country for work or study, or get married and start a family there.
Domicile of Dependency: Domicile of dependency is when you are financially dependent on someone who lives in a different country. This might happen if you are studying abroad or working in another country on a temporary basis.
The Effect of Domicile on Inheritance Tax in the UK
If the deceased was domiciled in the UK at the time of death, then their entire estate is subject to inheritance tax. This includes any property located outside of the UK, as well.
However, if the deceased was not domiciled in the UK, then only their UK assets are subject to inheritance tax. This means that any property located outside of the UK, as well as any assets held in trust, are not subject to inheritance tax.
The effect of domicile on UK inheritance tax can be significant, particularly for expatriates who have property or assets located outside of the UK. If you are an expatriate with property or assets located outside of the UK, it is important to seek professional advice to ensure that your estate is planned in a way that minimises your exposure to inheritance tax.
The Effect of Expat Status on UK Inheritance Tax
When it comes to UK inheritance tax, the expat status of the person leaving behind an estate can have a big impact. If you are an expat and you die without a will in place, your estate will be subject to inheritance tax at a rate of 40%. This is because the UK government views your estate as being based in the UK, even if you are living abroad.
Mitigating Inheritance Tax
However, there are some ways to mitigate this. If you have a will in place which designates your assets to be distributed according to the laws of your country of residence, then your estate may not be subject to UK inheritance tax.
You may also be able to elect for your spouse or civil partner to inherit your estate free of inheritance tax, regardless of their nationality or country of residence. Every case is different and you may be able to avoid inheritance tax with the proper estate planning.
If you are an expat and you are planning on leaving an inheritance to loved ones back home, it is important to seek professional advice to ensure that your wishes are carried out and that your heirs do not end up paying more tax than they need to.
Inheritance Tax Thresholds
Inheritance tax is only payable on assets that are above a certain value. Currently, this tax threshold is £325,000. This means that if your estate is valued at less than £325,000, you will not have to pay any inheritance tax.
If your estate is valued at more than £325,000, then you will be liable for inheritance tax at a rate of 40%. This means that for every £1 over the £325,000 threshold, you will owe 40p in inheritance tax.
It’s important to note that these rules can change over time. So it’s always best to consult with a financial advisor or solicitor to get the most up-to-date information before making any decisions about your estate planning.
If you are an expat living in the UK, it is important to be aware of the inheritance tax laws in place. These laws can have a big impact on how much money your loved ones will inherit from you when you pass away. While the rules may seem complex, there are ways to minimize the amount of inheritance tax that your family will have to pay. With careful tax planning and advice from a qualified professional, you can ensure that your loved ones receive the maximum benefit from your estate.