Inheritance tax planning is a complicated issue that requires careful attention. Under current legislation, UK Inheritance Tax is levied on estates valued at over £325,000 at a rate of 40%. It is little wonder that around £5.4 billion in revenue was collected in 2018/19 by HMRC!
If you are an expat, inheritance tax could apply to many of your non-UK assets. Beginning the process of inheritance tax planning as soon as possible will help you understand your rights and make the best possible choices for your individual situation. Doing so also gives you the opportunity to ensure that your estate passes to your heirs on death with as few deductions as possible.
The process of minimising inheritance tax exposure for heirs can be particularly difficult for foreign residents whose cross-border situation is likely to give them additional tax planning headaches.
In the following section we examine some of the key issues so that you can start evaluating your options.
UK Inheritance Tax
As of April 2020, the UK’s inheritance tax threshold allows the first £175,000 of any estate to be passed on without attracting any charge. The ‘nil-rate band’ provides further Inheritance Tax relief in the form of a tax-free allowance of £325,000 of the value of your main home (£650,000 for couples). Fortunately, if you are an expatriate, you can still claim this allowance on your main home even if it is outside of the UK.
In the event of the death of a UK national living outside of the country, UK Inheritance Tax is only levied on their UK-based assets; this would include property investments and bank deposits.
Assets excluded from UK Inheritance Tax include:
- Overseas pensions
- Foreign currency accounts
- Holdings in authorised unit trusts and open-ended investment companies (OEICs)
However, not every person who identifies as an expat will be exempt; HMRC will treat you as being domiciled in the UK if you have:
- Lived in the UK for 15 of the last 20 years, or;
- Had your permanent home in the UK at any point during the last 3 years of your life.
Double tax treaties
Also known as double taxation conventions, double tax treaties (DTTs) are agreements between two states which provide assurances regarding cross-border taxation of trade, investments, income and assets. Double tax treaties prevent excessive foreign taxation and discrimination. The UK has numerous double tax treaties in place with other nations.
Double tax treaties can apply to overseas pension transfers, and matters relating to succession and inheritance. It is important therefore for British expats to plan thoroughly.
In terms of inheritance planning, double tax treaties protect the estate from having to pay inheritance tax in the source country (for example on the deceased’s family home in the UK), and also in the jurisdiction of the deceased’s residency at time of death. If inheritance tax is paid twice, the estate can reclaim it or receive tax credits.
Double tax treaties allow that:
- the country in which the deceased was domiciled may tax all property, regardless of its location.
- the non-resident country may tax only certain types of property in its jurisdiction, especially immovable property.
- measures will be in place to decide which country gives credit for double tax levies.
- unilateral relief will be applied in the rare cases where the DTT provides less relief than that which would be provided by Unilateral Relief.
In the event that no double tax treaty exists, it may still be possible to apply for relief under the HMRC’s Unilateral Relief provisions.
Challenges
One challenge faced by many UK and EU citizens, is that some European Member States apply inheritance tax to beneficiaries, while most others apply it to the estate. This can lead to difficulties in inheritance tax planning.
The European Commission has been working for some time on solutions to the problem of double taxation on cross-border inheritances. Despite significant advances in this area, both Brexit and ongoing complexities make it prudent for expats with assets across multiple jurisdictions to seek inheritance planning advice from specialist cross-border financial consultants.
Inheritance Tax Planning for Expats in the EU
AXIS Financial Consultants specialise in helping expats in the EU manage their cross-border financial affairs. Our expertise extends from wealth management services to retirement planning and cross-border inheritance tax planning.
Our specialist advisers can help you mitigate UK Inheritance Tax; there are various ways to do this. We can assist with compliant investment structures, intelligent wealth transfer, and life assurance vehicles such as Assurance Vie products in France. Whatever your situation, we make it a priority to ensure that you are in control of your wealth and your legacy.
Contact us today for a full assessment of your needs.