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As inheritance tax revenue continues to soar for the UK Treasury year-by-year, it seems more families are getting caught in the net. In 2016/17, the UK government collected a record high of over £5 billion – 9% more than the year before. 

For expatriates, it can be especially difficult to know where you stand with UK inheritance tax. But with rates at 40%, it pays to understand your position and what you can do to minimise exposure for your heirs. 

1.   You could still be UK-domiciled

Even after many years of living abroad, you could still be considered UK-domiciled, bringing you into the firing line for inheritance tax. This could be the case, for example, if you still hold UK assets or show intentions to return one day. 

While it is possible to adopt a domicile of choice overseas by severing all ties with the UK, domicile law is extremely complex. Also, new rules could mean that returning to the UK for a relatively short period – say, due to family illness – could reignite inheritance tax liability for non-domiciles. For the best outcome here, seek specialist, personalised guidance.

See more about the changes to UK domicile rules

2.   It affects UK assets and potentially your worldwide estate

For UK domiciles, UK inheritance tax applies to your entire estate, not just UK assets, and not just property. 

Even if you are not UK-domiciled, any British assets attract UK inheritance tax. This now includes all UK residential property. Before 5 April, property owned through a corporate structure (‘enveloped’) was generally exempt, so if you hold UK residential property in this way, explore your options for the most tax-efficient way forward.

3.   A new relief was introduced this year…

Until recently, the only available inheritance tax relief was a £325,000 nil-rate band (£650,000 for couples). But in April 2017, the ‘residential nil-rate band’ or ‘family home allowance’ came into effect, providing extra relief when passing on a main home to direct descendants. The good news for expatriates is you can claim this allowance on a property outside the UK, provided it is your main home (although local inheritance taxes may still apply). 

Being introduced gradually, the tax-free threshold started at £100,000 and rises by £25,000 each April until it reaches £175,000 in 2020/21, and then tracks inflation. As with the standard allowance, you can transfer any unused balance to your spouse/civil partner, making a total potential threshold for a couple of £1 million by 2020. 

4.   …but it has limitations

To be eligible for the allowance, your property must be seen to be your main home that you have lived in at some point, thereby excluding investment properties. It is only available on one property that is passed directly to children or grandchildren, so homes owned indirectly through certain trusts, for example, may not qualify.

Also, larger estates will not receive full relief – estates worth over £2 million have a lower threshold, and those over £2.2 million do not receive anything at all. Your entire estate is counted here, including savings and investments, certain trusts, pay-outs from life insurance policies, pension lump sums from the death of a spouse/partner, cars, furniture and personal belongings such as jewellery. 

See more on the new inheritance tax threshold

5.   Your home could tip you over the threshold

Despite the new allowance, the government’s inheritance tax coffers continue to swell. This has much to do with the increasing value of assets – particularly property. Now, residential property accounts for more than a third of a typical estate liable for inheritance tax.

As house prices have risen, so has the number of estates that fall outside the tax-free thresholds – and the amount payable. If, for example, combined assets exceed the £2.2 million value limit for the property relief in 2020, the £175,000 allowance could be replaced by a £70,000 inheritance tax bill.

Additionally, the standard relief – frozen at £325,000 since 2009 and fixed until 2021 – has not kept pace with inflation in the way that the value of property or other assets has. The UK government’s Office for Budget Responsibility predicts the inheritance tax haul will exceed £6 billion by 2021 as asset growth continues.

However, there are ways to mitigate UK inheritance tax other than gradually transferring (or spending!) your wealth within your lifetime. Expatriates can find tax-efficient investment structures or trust arrangements that suit their country of residence, for example, or acquire a domicile of choice overseas

An adviser with specialist, cross-border expertise can help you establish your domicile status and how UK inheritance tax interacts with the local inheritance tax in your country of residence. With good estate planning, you can structure your wealth to take advantage of all reliefs available and ensure your legacy ends up in the right hands without leaving your heirs an unnecessarily large tax bill.

Find out about our estate planning services

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals are advised to seek personalised advice.