UK nationals who move abroad face not only the complexities of a foreign tax system but may also remain liable to some UK taxes, particularly inheritance tax (IHT).
IHT is the tax paid on an estate when the owner of that estate dies. Depending on certain criteria, the tax may also be payable on gifts or trusts made during that person’s lifetime.
Your liability depends on the domicile status of the deceased at the time of death or, in the case of trusts, the settlor’s domicile status at the time an asset is gifted into trust. The following examples demonstrate how effective IHT planning could vastly reduce your overall tax liability.
|Country||UK Inheritance Tax||French Inheritance Tax||USA Inheritance Tax|
|IHT (or Equivalent) %||40%||5–60%||18–40%|
|Liability on GBP 1 million inheritance||GBP 400k||GBP 50–600k||GBP 180–400k|
It is important to understand the local tax legislation and inheritance tax rules. For example, IHT rules in France mean that the rate you pay depends on your relationship with the deceased, and similar rules apply in other countries too. Knowing the rules can make a significant difference to the amount your beneficiaries receive and Forth Capital can help you optimise your inheritance tax plans.
Typically, IHT is paid by the executor using funds from the estate of the deceased. Trustees of a trust are then responsible for the payment of IHT on the assets held in that trust, and sometimes people may have to pay tax on gifts received. However, the payee of IHT depends on a number of factors, and different factors may affect who should pay the IHT owed.
In the past, IHT planning used to be an activity confined to the very rich. However, growing affluence means that this is no longer the case. Even families and individuals with a relatively moderate level of wealth now need to plan ahead to ensure that their assets are passed on to their loved ones as tax-efficiently as possible.
For UK legal purposes, every individual has a domicile in a particular jurisdiction. You can only have one domicile at any one point in time and your domicile usually corresponds with the country in which you were born and brought up, but this is not always the case.
Domicile is an important concept as it determines your liability to UK IHT. Domicile is more permanent than residence and is very difficult to change. Even if you have been living overseas for many years, you may still be regarded as domiciled in the UK which means that UK IHT would be payable on your worldwide estate.
Changing your country of domicile is an important legal decision that should not be taken lightly. While the benefits of a 10 per cent IHT rate in Portugal, or a similar rate of IHT in Spain, are likely to reduce the IHT your beneficiaries will pay, it is crucial to consider this liability as part of a full financial planning analysis to ensure you are optimising the results for your specific scenario.
If you are a UK domicile and you are resident overseas, or looking to move overseas, we can assess your situation and advise you on any steps you will need to take to change your UK domicile status. If you become non-UK domiciled, UK IHT is unlikely to be an issue for you, although you will need to consider the IHT regime in your new country of residence. The amount of IHT payable in that country may depend on where your assets are located, who the beneficiaries are and where they are resident.
Domicile and IHT are important when carrying out estate planning. You will want to ensure that, on your death, your estate passes to your intended beneficiaries with as little tax cost as possible. Estate planning often involves looking at the rules in several jurisdictions and ensuring that the planning is effective in all jurisdictions concerned.
The IHT planning process is complex and one in which mistakes can be made. For this reason, it is important to seek professional financial advice before you make a start.
Forth Capital Inheritance Tax Advice
If you are concerned about potential IHT or would like clarification on how to mitigate UK IHT obligations, speak to a Forth Capital tax adviser.
You are guaranteed to receive advice, and confidentiality is always assured. Our expert advisers will guide you through the IHT rules, advise you of the opportunities for tax planning and highlight any potential pitfalls.
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