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I have lived outside of the UK for many years. Do I pay inheritance tax? What is UK domicile?

Under UK law, an individual acquires a domicile of origin at point of birth, usually following the domicile of their father at the time. From age 16, it is possible to establish a new domicile of choice by moving permanently to a new country, cutting ties to the UK and intending to remain in the new country for life, including having it as a final resting place. Merely living outside of the UK for many years is not sufficient with the liability remaining to inheritance tax on assets globally.

How much is inheritance tax in the UK in 2023?

The current rate of UK inheritance tax on death is 40%. On chargeable lifetime transfers (usually lifetime gifts to most trusts), the rate is 20% initially with additional periodic charges every 10 years and exit charge on distributions from the trust.

How to calculate inheritance tax in UK

To establish the inheritance tax liability at point of death, for a UK domiciled person, add together all liable assets globally, deduct any allowances and tax the balance at 40%. Remember, simply being non UK resident for many years does not exempt an individual from UK inheritance tax. Domicile drives the liability, with residency usually only having a minor impact. For a non UK domiciled person, add together the value of all UK situs assets, deduct any allowances and tax the balance at 40%.

Do you pay tax on inherited money?

UK inheritance tax is levied on the estate of a deceased person, with tax payable by the estate before distribution to beneficiaries. So, it is usual for any liability to have been settled before value is received by beneficiaries. Sometimes gifts made to beneficiaries within 7 years of death of the donor are also retrospectively taxable to inheritance tax.

The seven-year rule / Gifting

This rule is largely to prevent deathbed planning, with the donor needing to survive 7 years after making a transfer of value to other individuals or trusts. Such gifts are commonly referred to as a potentially exempt transfer (PET) or, when made to a most trusts, a chargeable lifetime transfer (CLT). In many cases, after the donor has survived for 3 years, a process of taper relief applies, reducing the tax bill down to zero after 7 years.

Inheritance tax payable on second death

Transfers between UK domiciled spouses are 100% exempt from inheritance tax, either in lifetime or on death. Therefore, if, on death of the first spouse, all assets are left to the survivor, any inheritance tax is at least deferred until second death. On first death, in order to avoid wasting a potential £325,000 nil rate band(NRB) and £175,000 residence nil rate band (RNRB), both are carried forward for use by the survivor on their own death, giving a potential £1m total exemption. Non UK domiciled spouses are subject to different rules but, with careful planning, are able to benefit from a similar outcome.

How to reduce inheritance tax

Inheritance tax mitigation is relatively straightforward with careful planning. Simple ways include making gifts in lifetime or using family trusts to maintain an estate value below the exempt amounts, especially below £2m to make available the full property nil rate band. Gifts or bequests to charity or the use of life assurance to fund the liability are also popular options. It is vital to have a Will to avoid intestacy on death otherwise the deceased has no influence on how wealth is distributed and the inheritance tax bill potentially worsened.

How to avoid inheritance tax with a trust

Appropriate use of trusts can drastically reduce the exposure to inheritance tax, whilst retaining an element of control both in lifetime and after death. Succession planning and asset protection may also be desirable advantages and, whilst it is generally necessary to exclude yourself from benefit, at least in part, careful planning can produce a compromise to access and inheritance tax mitigation.

Who is entitled for advice on UK inheritance tax?

Anyone who is domiciled in the UK by origin, by choice, elected or deemed domiciled as well as anyone non UK domiciled but with UK situs assets, should seek advice on UK inheritance tax. It is particularly common for non UK domiciled people to own UK property or UK listed shares and, with careful planning, inheritance tax may be reduced or avoided entirely.

To find out more about UK Inheritance Tax planning, contact deVere China’s experts today.