Being an Expat and UK Inheritance Tax
UK inheritance tax is a special tax around the world. It applies to all assets of UK domiciles and anyone in the world with a UK asset.
Domicile is different from residency. A British domicile living overseas, and resident for several years could still be subject to UK inheritance tax. This will be on worldwide assets, including property in other countries.
There are two main types of UK domicile:
• A domicile of origin which is given to you at birth and based on your parents' domicile, and
• A domicile of choice where you can choose a new domicile (For instance, the UK)
UK Inheritance Tax is a 40% tax applied to estates that are worth over £325,000 (this includes your savings, possessions and your property).
The first £325,000 of the estate is tax-free (nil-rate), and the 40% tax only applies to the rest of the estate.
There are some exemptions to Inheritance Tax. For example, if you leave all your estate to your UK husband, wife or civil partner, then no Inheritance Tax will be payable, but it must be the entire estate left to them. When a spouse or civil partner dies, any unused part of their £325,000 nil-rate band can be passed on to their surviving partner.
Anything you leave to a charity will be exempt from Inheritance Tax. Also, if you leave 10% of your estate or more to charity, then a reduced rate of 36% may apply to what is left over.
You may want to gift money and property to your relatives or friends before you die. Be aware that gifts made even while you are alive could be liable for Inheritance Tax, depending on how much they were and when they were given. However, gifts of up to £3,000 in each tax year are exempted, as are small gifts to individuals and some wedding or civil partnership gifts.
If you are thinking of giving away money or property before you die, make sure you know the rules beforehand, to avoid any unexpected Inheritance Tax bills.
It appears deceptively simple for your heirs to pay the tax liability by selling some of your assets. However, it is not usually possible to sell assets until Probate (or Letters of Administration) has been granted. This cannot normally be obtained until at least some of the Inheritance Tax liability has been paid.
Three Steps to The Solution
There different ways to mitigate a potential inheritance liability and broadly they fall into three steps.
1) Draw up a tax efficient Will and consider how ownership of your possessions could be arranged between yourself and your spouse to meet personal requirements and minimise tax liabilities.
2) Make gifts during your lifetime to reduce the value of your estate. This could be direct or using a Trust
3) Ensure that a fund of money will be available on your death so your beneficiaries can use this to meet the tax liability.
The full exemptions and rules of Inheritance tax are complicated. You should seek advice regarding this and as part of an overall estate plan.
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