At up to 40% of the value of an asset, Inheritance Tax (IHT) is quite a meaningful charge on an individual’s estate, encompassing your savings and investments, alongside property and other specific assets.
Whether UK IHT or other international estate taxes are applicable depends on many factors, such as where the asset sits, what the owner’s residency is or indeed, their domicile status?
It’s not difficult to get confused about when IHT applies, as jurisdictions across the world tax individuals according to different rules. For example, the US taxes its citizens globally regardless of where they reside, whereas most of Europe considers residency primarily, rather than nationality. Meanwhile, the UK has a blended residency-based system for most taxes, but estate taxation is related to the concept of domicile.
With this in mind, it is particularly important to take tax, legal and financial planning advice when holding assets across or moving between these regions.
Focusing on the UK, it is notable that two residents with exactly the same assets, could have a completely different IHT liability, depending on their domicile status. The rules around domicile are dictated by where you are born and the domicile of your father (or if not present, mother) or where you look to live permanently or indefinitely. Our Introduction to Domiciles guide provides more details on the intricacies involved.
If you are UK resident and domiciled, please see our Introduction to Inheritance Tax guide for an overview of the core considerations in the UK.
If you are not UK domiciled, there are some additional considerations, which we explore in greater detail below.
Non-resident or domicile, but with physical UK assets
If you are not UK resident or domiciled but hold assets in the UK, the assets may be subject to UK IHT. Consideration should be given to insuring the liability due on death. We can help in arranging such insurance.
UK resident but non-domiciled
If your domicile of origin is outside the UK, you can claim a non-domicile status with HMRC (His Majesty’s Revenue & Customs) and as a result exclude your non-UK assets from the UK IHT regime. For example, property or assets outside of the UK would not be subject to UK IHT on death.
However, once you have been a UK tax resident for 15 years in the last 20 years, you are ‘deemed domicile’ in the UK. At this point, your global assets become subject to UK taxation, including IHT.
If your assets are also subject to taxation in the country they are held, you should receive tax advice to consider what priority or offsetting any double tax treaty provides.
Trusts
In order to avoid taxation of your worldwide assets in the UK, you can look into setting up and funding an Excluded Property Trust, onshore or offshore (for example in the Channel Islands, Jersey, Guernsey). The key is not to hold any UK situated assets before you become deemed UK domiciled. The assets within an Excluded Property Trust remain outside the UK estate and are not subject to the typical regular trust charges (for example the 10-year trust anniversary charge).
Mixed domicile spouse
A common way of mitigating tax liability on the estates of individuals, be it in the UK, US or other tax jurisdictions, is passing assets between spouses, for example on death, as it does not trigger IHT liability. This exemption however does not always apply when spouses have domicile status in different jurisdictions. So, a gift from a UK domiciled to a non-domiciled spouse will not receive the full spousal exemption, which is instead limited to £325,000. Again, life insurance may be a cost-effective way to protect against this risk for the period the spouse is non-domiciled.
We’re here to help
The two concepts – residency and domicile, have to be looked at together, particularly when dealing with clients who have an international background. The ideal time to take advice is before moving jurisdictions, as once you have moved, it may be too late to make tax efficient changes to your assets.
We are living in unstable political times. There have been proposals made which focus on removing the non-domicile regime in the UK, however, no firm decisions have yet been made. We advise international families based on the current legislation and tax rules, whilst trying to retain flexibility for the future.
Please contact us if you are looking to move out of, or to the UK, or you have family members or assets across different tax jurisdictions, so we can assess your individual circumstances and develop international estate planning strategies, intended to secure you and your family’s financial future.
Partners Wealth Management does not provide tax, legal or accounting advice. It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission. Taxation is based on your individual circumstances and may be subject to change.