Last Updated on 6th September 2024
Inheritance tax, or IHT, is a complicated topic with many different factors, clauses and conditions to consider. This complexity means that, unlike other British tax categories, IHT differs in how it applies to each estate and is a domestic tax likely to affect international expatriates.
Generally, estates held by British domiciles are exposed to IHT if the net value exceeds the £325,000 threshold – but in reality, few estates end up paying substantial IHT charges due to the number of exemptions and exclusions, including those applied to gifted assets and transfers made between spouses.
In this article we summarise the basics of how IHT works and how the tax levy can change substantially in different sets of circumstances. It remains important to contact an experienced financial adviser or wealth manager for more tailored advice specific to your circumstances.
Who is Liable for UK Inheritance Tax?
IHT applies to the estates of all British domiciles, regardless of whether they still live in the UK or are living abroad as expats. The nil-rate band (NRB) is currently set at £325,000, below which estates are not subject to IHT.
Who Is Classed as a UK Domicile?
Most people are domiciles of their home country or the place they are born – this is also called your domicile of origin.
The rule of thumb is that if your father worked, lived, and was permanently a resident of the UK, you are a UK domicile. The system bases your domiciliary status on your father if your parents were married when you were born, or if you are adopted, or on your mother in other scenarios.
Your place of birth is somewhat irrelevant, so if you were born overseas, but your father was a UK domicile, your status remains the same. This is because you can also have a domicile of dependence, which refers to the domiciliary status of your key parent or caregiver.
In some cases, permanent overseas residents can become a domicile of that country by choice. Applicants must prove they live in the new country permanently, intend to stay for life, and are willing to ‘break ties’ with their domicile of origin.
A key point to bear in mind is that it remains possible to live away from the UK for many years and remain a domicile, and most expats will be British domiciles, irrespective of their circumstances.
What Does Being a UK Domicile Mean for IHT?
Being a UK domicile means that, wherever you live and for however long, your estate may be liable for British IHT on all assets at your death. Even if there is no IHT payable against the value of your estate, your beneficiaries will normally be expected to submit declarations to HMRC.
British domiciles may also be liable for IHT on transfers of wealth or assets made during their lives. However, gifts made at least seven years before your death are excluded from your estate and IHT calculations. This type of gift is referred to as a lifetime transfer or lifetime gift.
Which Assets Are Liable for British Inheritance Tax Charges?
IHT is charged on your worldwide assets. That includes anything you own in any country. For example, if you own a property in Portugal, it is part of your estate and is liable for the tax.
Some reliefs may apply, where assets can be partially exempt – in effect, the asset’s value is reduced for IHT assessment purposes. Reliefs can apply to agricultural properties and trading commercial businesses.
Am I Liable for Inheritance Tax as an Expat Living Abroad?
You are, indeed. Regardless of where you live, whether in Europe or further afield, you are liable for IHT if you are a UK domicile.
The issue may be that, due to being a permanent or tax resident, your estate might also be exposed to inheritance, wealth tax, and other taxes in your country of residence. In this scenario, it is important to understand whether double tax treaties apply and to put measures in place to avoid any potential double taxation situations.
What is UK Inheritance Tax?
Currently, the tax is charged at a standard rate of 40% on estates worth over £325,000. As an illustration, if you have accounts, savings and assets worth £625,000, your beneficiaries could potentially be liable for a tax deduction of £120,000 against your estate.
This liability is subject to varied exemptions, such as a reduced IHT rate of 36%, which can be applied to some assets if the estate owner leaves at least 10% of their net wealth to a recognised charity.
Are There Allowances Against IHT Charges?
There is an allowance of £325,000, under which IHT is not chargeable. Any estates valued below this threshold are not liable for any inheritance tax.
Couples have an allowance per person, so the combined total below which no tax is chargeable is £650,000 between them. There are also options to transfer unused proportions of the NRB to a spouse or civil partner, meaning a surviving spouse may have a larger allowance that is potentially as high as double.
What are the Issues with IHT Allowances?
One of the biggest challenges is that the threshold (or nil band) has remained static since 2009. Given the substantial change in property valuations over those years, the nil band is far less valuable than when it was first introduced.
Therefore, IHT is often considered a stealth tax. A property worth, say, £300,000 in 2009 is likely to now be worth well above the £325,000 threshold, given appreciation over the intervening years. So, many people who would have been exempt from IHT in 2009 are more likely to be liable now and need to take proactive steps to protect their estates from unnecessarily high taxation.
How Do Spousal Exemptions Work With IHT?
The spousal exemption means that couples are permitted to transfer assets between themselves, whether while alive or on the death of one person, without the value of that transfer being liable for inheritance tax.
There is no limit to this exemption, although the spouse or civil partner receiving the assets must be a UK domicile. Couples outside of marriage or a civil partnership are not covered by the exemption.
Can I Claim the Spousal Exemption and the Nil Band Threshold?
Yes, you can, and this applies to each partner within a couple. On the death of the first partner, if you were to claim the spousal exemption and assets thereafter (if any remained) fell into the nil band category, there would be no inheritance tax to pay.
How Much is IHT Worth to HMRC in the UK?
Inheritance tax generates substantial income for the UK tax office. In the 2023/24 tax year, HMRC collected approximately £7.5 billion, compared to £7.09 billion in the previous tax period.
Is Inheritance Tax Voluntary?
IHT is often considered a voluntary tax by professionals in the financial advisory space since there are varied compliant, legal ways to reduce or remove exposure to IHT liabilities. The key is to structure your assets with a long-term plan based on independent, professional support from an experienced financial adviser.
Do UK Residents Who are Non-Domiciles Pay IHT?
Currently, non-domiciles living in Britain, also referred to as non-doms, are liable for IHT, but only against assets that are held in the UK and exceed the £325,000 nil band threshold.
There is, though, a considerable likelihood that this will change. The previous Chancellor announced the abolition of the ‘non dom tax status’ from April 2025, before the recent change in government.
This position seems to remain, with announcements made by the new UK government that indicate ‘radical’ planned reforms, reducing the tax advantages offered to affluent non-domiciles.
Is it Possible to Lose My Status as a UK Domicile?
You can change your domicile status, but the process isn’t straightforward.
If you were to leave the UK and live in another country as a tax resident for at least six years and have also lived in that country for at least six of the last 20 years, you might be able to acquire domiciliary status in your new country of residence.
Typically, to lose your UK domiciliary status, you will need to:
- Sever all UK ties without any assets, properties, businesses, clubs or frequent visits.
- Demonstrate intent to remain a permanent resident in your new host country.
It is strongly advisable to seek expert advice if you are considering changing your domiciliary status to ensure you understand the process and the potential ramifications.
Are There Advantages to Becoming a European Domicile?
Some British citizens living overseas as expats opt to apply to change their domicile – which may negate the future exposure of their estates to UK IHT. There are several EU countries that do not have an equivalent form of IHT, including Portugal, Malta and Cyprus.
However, it is essential to remain aware of alternative forms of taxation, such as transfer taxes and Stamp Duty.
How Quickly Can I Change My Domiciliary Status?
Switching your country of domicile can be complex, and the process can take several years. The suitability of this tax management strategy may also depend on your circumstances.
If you choose to apply for a new domiciliary status, this is called your ‘domicile of choice’. It is vital to go through the proper channels to ensure you have applied correctly and to be mindful that you must be able to make a compelling case, evidencing that you live permanently in another country and have no intention of returning to the UK.
Do I Need to Be a Non-UK Domicile to Avoid IHT Charges?
No, changing your domiciliary status isn’t essential and is just one possible option – although one that we might not always suggest. It is also unwise to rely on being a non-UK domicile as your only strategy to mitigate the impact of IHT charges on your heirs.
Changing your status to become a domicile in a country of your choosing can take many years to acquire and yet can be sacrificed if you:
- Return to the UK
- Relocate to another country
- Re-establish ties with the UK
In order to avoid IHT, your domicile of choice needs to be valid at the time of your death or when you make a lifetime transfer of your assets. Therefore, if you run the risk of relying on this status and then lose it, you may not have any other structures in place and might not have sufficient time to re-apply for a new domicile.
Therefore, the best way to control your exposure to IHT, and that of your heirs, is to create a comprehensive tax-efficient strategy tailored to your specific assets, residency and domiciliary status, and with full oversight of the factors that will impact the overall tax burden applied to your estate.
Please contact your nearest Chase Buchanan Wealth Management team for more information about inheritance tax charges and the optimal restructuring options to manage the tax payable on your estate.
* Updated April 2024