British expats could pay inheritance tax on their global assets even if they have lived abroad for many years.
IHT tracks domicile, and even long-term expats can be taxed if they have not searched for a domicile of their choice in another country after leaving the UK.
In his 2021 budget, Chancellor Rishi Sunak froze IHT allocations for five years, and the measure is expected to raise an additional Â£ 1 billion for the treasury.
But there are ways to beat the IHT tax trap for expats.
Inheritance tax explained
The inheritance tax or IHT is a tax on your personal wealth when you die.
If you are domiciled in the UK, the IHT is due on your World Heritage at a rate of 40% for the pound you leave above the zero rate bands.
Real estate prices lead to tax grab
The main problem is with expats who own residential property in the UK.
If prices go up, the amount of IHT paid increases.
But if house prices fall, executors administering expatriate estates can recoup any overpaid IHTs by invoking a little-known rule.
The Office of Budget Responsibility – the independent body responsible for verifying the Chancellor’s budget figures – estimates that house prices will drop after the current stamp duty holiday ends, only to rise significantly by the end of the freeze on stamp duty. IHT allocations.
The OBR house price forecast shows that values ââwill rise 5.7% this year, fall 1.7% in 2022, then rise 0.8% in 2023, 3.9% in 2024 and will continue to increase by 4.3% in 2025.
What impact will this have on real estate prices?
The land registry puts the current average price of a house in the UK at Â£ 251,500. Taking that figure, here’s how the OBR forecast affects this value during the IHT freeze:
|Year||OBR Real Estate Price Forecasts||Average price of a house|
|2021||+ 5.7%||Â£ 265,835|
|2023||+ 0.8%||Â£ 263,406|
|2024||+ 3.9%||Â£ 273,679|
|2025||+ 4.3%||Â£ 285,447|
Figures show that the price of a home will rise 13.5% during the freeze.
Zero rate IHT bands
IHT has two zero rate brackets – one for the general estate and another for someone’s primary residence.
The zero rate band for primary residence applies to expatriates even if they have a primary residence in another country.
During the freeze, the zero rate bands for an individual are:
- Standard Â£ 325,000 zero rate band
- Â£ 175,000 primary residence at zero rate
If they are unused and passed on to a spouse, the rates are doubled on the second death. This gives a maximum zero rate range of Â£ 650,000 for a general estate and an additional Â£ 350,000 for the family’s primary residence – a total of Â£ 1million.
The bad news is that the average house price in London is already Â£ 514,000, according to the Office for National Statistics. Add 13.5%, making the average capital house worth Â£ 583,390 by 2025.
It doesn’t leave much tax saving room for the rental purchase or for secondary owners with two or more properties.
How to beat IHT gel
The first step to avoiding IHT is to understand how the system works.
To do this, you need to complete a personal audit to reveal your net worth – the value of everything you own minus what you owe.
Once you’ve done this exercise and know the extent of any IHT issues you may be facing, it’s time to take stock of what you can do to lower the tax bill.
Transmit an offshore pension
Expats with a Recognized Qualifying Overseas Pension Plan (QROPS) can pass any unspent funds on death to their families without IHT.
The same goes for a qualifying non-UK pension scheme (QNUPS) or a self-invested international pension scheme (SIPP).
Under UK law, pensions are not part of a person’s estate when calculating the IHT.
Another tip is that the Lifetime Retirement Allowance (LTA) does not apply to QROPS or QNUPS. The LTA is also frozen for five years. This allows QROPS savers to cross the Â£ 1.07million pension limit without penalty.
Make your pension the last money to spend
Make a priority list of retirement expenses and put your pension as the last thing to spend in retirement.
This way you decrease your net worth subject to the IHT and leave your money which attracts the IHT for your loved ones when you pass away.
Give all the money you can do without
Donate your cash from income that does not affect your standard of living rather than keeping it in the bank. This money is exempt from IHT and is not included in your net worth.
These donations are always IHT-exempt even if you die within seven years of the donation under potentially exempt transfer rules (PET).
Maximize your spouse’s pension
If you don’t have a QROPS but still have money in an onshore pension or an international SIPP, you can put money available in your spouse’s pension to double the cap of 1.07 million. pound sterling.
As an expat, you will not get tax relief on contributions, but you will also not pay the IHT rate of 40% on the same money remaining in the bank.
Claim an overpaid IHT on the property
Your executors can recover the IHT paid on the disposal of an asset if the price drops within four years of the date of your death.
The IHT is calculated on the value of the property on the date of the owner’s death. If the value decreases over the next four years, the executors can ask for a refund.
The OBR predicts that prices could drop in 2022 and not recover until 2024. Any excess IHT paid over the purchase of rentals or second homes can be refunded if so.
For example, a purchase to let is valued at an average price of Â£ 265,835 on death and drops to Â£ 261,316 a year later. On the other hand, the IHT at the date of death is Â£ 106,334 but drops to Â£ 104,526 a year later – a difference of Â£ 1,808 which is recoverable.
Reimbursement is not automatic but must be claimed.
The same rule applies to any impairment loss on the disposal of shares.
Freezing inheritance tax
The IHT is one of the most complicated and least understood taxes, especially for expats who could still fall into the UK tax net even if they have lived abroad for decades.
Here are some answers to the most asked questions about how to avoid paying IHT legally.
Chancellor Rishi Sunak has frozen all IHT allowances and reliefs until April 6, 2025. Normally, the limits would increase each year based on inflation.
Yes, but you should speak with a local tax professional to determine if local inheritance or death taxes apply.
The reduction of the principal residence is accompanied by some caveats concerning the transmission of the family house. First, the rule only allows direct descendants to inherit. These are:
Children or grandchildren or direct descendants, including stepchildren, adopted or foster children or a child whose deceased has been appointed guardian at the age of 18 or under.
A husband, wife or civil partner of a direct descendant (including a widower or surviving civil partner
A direct descendant is a blood relative in a direct line of descent.
No. Estate laws apply without a will, but it’s always a good idea to clarify and explain your intentions in a will to avoid confusion.
A range of professionals provide estate planning advice, including tax advisers, lawyers and financial advisors.
Both types of gifts are defined in the IHT law.
Exempt transfers are explained in the legislation, while potential exempt transfers (PETS) are other gifts between individuals.
IHT’s exempt gifts include Â£ 5,000 towards the cost of a child’s marriage. Any additional money would be a PET with IHT billed if the donor did not live seven years after making the donation.
Learn more about IHT exempt gifts and PETS
Many countries have some form of wealth tax on death. In the UK, it’s IHT. As an expat you may be liable for local taxes and IHT in the UK, but the rules depend on where you are tax resident and considered domiciled.
The domicile is different from the tax residence.
Learn more about tax residency and domicile.
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