Inheritance Tax
INHERITANCE TAX
Inheritance tax and estate tax are often triggered by death, but they function differently. Estate taxes are imposed on the net value of property owned by the deceased at the time of death, while inheritance taxes are levied on the individuals who receive the property. These taxes are generally accompanied by a gift tax to prevent circumvention through pre-death property transfers.
WHERE IS INHERITANCE TAX LEVIED?
Numerous countries impose taxes on estates or inheritances, including:
- France
- USA
- UK
- Spain
- Ireland
- Japan – which has the highest top marginal rate at an impressive 55%
HOW IS IHT TAX PAID?
HOW IS INHERITANCE TAX PAID?
In the UK, Inheritance Tax (IHT) is applied to the value of the deceased’s estate above the available Nil Rate Band (NRB), which is currently £325,000, at a rate of 40%. Many people maintain their domicile status even after living abroad for a long period. A common misunderstanding among UK expats is that only UK-based assets are subject to UK inheritance tax. However, the UK tax system operates globally, meaning the deceased’s worldwide estate is liable for inheritance tax.
NAVIGATING INHERITANCE AS AN EXPAT
Expats might also be subject to the inheritance tax regulations of the countries where they own assets. Different rules apply to non-domiciled spouses and partners, making it crucial to stay informed about estate planning with an expat will. Before probate can be granted, the probate fee and any due inheritance tax must be paid, which can result in a significant bill for beneficiaries before they can access their inheritance. Having a life insurance policy can provide the necessary funds for beneficiaries to cover these fees.
Additionally, there are other strategies to consider. For Australian expats, the 10-year tax rule offers a tax incentive that benefits those planning to move to Australia. This rule states that an investment held for ten years can be withdrawn without tax.
INHERITANCE TAX EXEMPTIONS
Several strategies can help reduce liability to inheritance tax, including:
- Transfers between most married couples and civil partners in the UK are IHT-free
- The surviving partner can inherit any unused NRB percentage from their deceased spouse
- The inheritance tax liability arises upon the second partner’s death
- Each individual can make an IHT-free gift of up to £3,000 per tax year
- This amount can be doubled for couples
- Any unused allowance can be carried forward to the next year
- You can give small gifts of up to £250 per person per year, without limit on the number of recipients, provided no other gifts are given to that person in the same tax year
- Lifetime gifts made to help with someone’s living costs (e.g., an elderly relative or a child) are exempt from IHT
- Other lifetime gifts may be exempt if they are made regularly from your income without affecting your standard of living. It’s essential to document your intentions and keep records with your will
- Bequests to charities, political parties, universities, and for public benefit are exempt from IHT
- A PET is a gift of any amount made more than seven years before death and is an outright gift without reservation. For instance, a parent cannot give away the family home and continue living in it while thinking they’ve avoided inheritance tax
- Pensions are among the most tax-efficient ways to avoid inheritance tax. Pensions aren’t subject to IHT as they don’t form part of your estate. This makes pensions a valuable tool for estate planning. Leaving your pension untouched and using other assets for retirement can potentially save on IHT
- Assets held within a trust are not subject to inheritance tax. Various trust options and other structures, such as offshore investment bonds, can be used to protect assets. Spending wealth is another strategy; those who spend their wealth are known as the “Ski” (Spending the Kids’ Inheritance) generation, but it’s essential to ensure sufficient funds remain for later retirement. It’s safer to be “Owls” – oldies withdrawing loot sensibly
MORE TAX OPTIONS
Pension income is taxed at marginal rates. Planning how you receive this income can lead to significant savings.
Capital Gains Tax (CGT) is applied to the profit made from disposing of assets, whether by sale or gifting.
Understanding agreements between the country where your assets are located and where you reside is crucial for planning, particularly for those retiring overseas with UK pensions.
With many options available to reduce future tax liabilities for your beneficiaries, it’s wise to start or update your estate planning now. Professional advice is always recommended for tax planning.
