Inheritance tax is not something that many of us like to consider on a regular basis. There comes a time, however, when it is necessary to take steps to ensure there are no surprises for the beneficiaries of your estate. This is where good planning comes in.
Inheritance tax (IHT) is not only charged upon death – gifting assets or settling them into trust also incurs potential tax implications. With recent changes to UK IHT rules for non-domiciled individuals coming into play too, now is a good time to review your tax position if your permanent home is outside the UK. We outline the changes below.
Changes for non-domiciliaries
Non-domiciled individuals are those whose permanent home is outside the UK. As such, they are charged UK IHT on their UK ‘situs’ assets, i.e. those located in the UK. However, if an individual has been living in the UK for an extended period of time, their status may change for the purposes of IHT.
As of 6 April 2017, a non-UK domiciliary who has been living in the UK for 15 of the previous 20 tax years will be considered UK domiciled for IHT purposes, and UK IHT will therefore apply to their worldwide assets.
If you fall into this category, the only way to ensure your international assets are not charged to UK IHT is to become not UK tax resident for at least six years. After four years, your assets will no longer be considered UK domiciled for IHT purposes, but six complete tax years must pass before you may return to the UK as a non-domiciled individual for UK IHT.
What this means for non-domiciliaries
The changes to UK inheritance tax for non-domiciled individuals have several consequences. For those living in the UK, a good course of action is to settle overseas assets into an overseas trust before being deemed a UK domiciliary. A trust retains the domicile status of the individual at the date it’s settled, meaning it remains non-UK domiciled regardless of the future domicile status of the individual.
For non-UK residents with UK residential properties, new anti-avoidance rules have been introduced. If a debt is taken out against a property and used in such a way that they aren’t subject to UK IHT, the debt will not be allowed as a deduction when calculating the IHT position. Put simply, if you purchase a property for £1m using cash, but subsequently remortgage to buy a property in Majorca, the full £1m would be charged to UK IHT, with no deduction allowed for the mortgage.
Find out more
Non-domiciliaries who wish to find out more about the changes or review their tax position should speak to a professional IHT specialist in order to minimise the amount of UK IHT they are liable for.