Do you remember John Major telling us that he wanted “to see wealth cascading down the generations” in the UK? All these years later and inheritance tax is still with us.
Your liability to UK inheritance tax is not directly linked to where you are resident; instead it is determined by domicile. Many British expatriates remain liable for this tax even if they have lived abroad for many years.
Inheritance tax threshold and rate
If you are a British domicile, inheritance tax is charged on your worldwide estate at the time of your death, plus any assets you have given away as gifts over the last seven years. It is also payable on certain lifetime gifts. UK assets remain are always liable to inheritance tax regardless of domicile.
The tax rate is a fixed 40%. This is now reduced to 36% if you leave at least 10% of your estate to charity.
The first £325,000 is taxed at 0% – the “nil rate band” per individual. This threshold usually increases each year in line with inflation, but as part of austerity measures it has been frozen since April 2009.
Spouses / Civil partners
There is no inheritance tax on assets passing between spouses and civil partners.
There is one exception. If you are a UK domicile but your spouse is not, they do not benefit from the blanket spousal exception. They only receive a one-off allowance of £55,000, on top of the nil rate band. There are plans to increase the £55,000 to £325,000.
When it comes to leaving assets to the next generation, spouses and partners can benefit from double the nil rate band. Any unused portion can be carried forward and used by the second partner on their death, giving a couple a potential combined threshold of £650,000.
The Domicile Factor
Domicile is a much more permanent concept than residence. It is notoriously difficult to change your domicile, but not impossible. The basic rule is that you are domiciled in the country where your life is centred, and which you regard as your homeland.
Even if you do successfully adopt a new domicile of choice, you will be “deemed” to be a UK domicile by HM Revenue & Customs (HMRC) for the next 36 months.
Determining and changing domicile is complex and can be very costly for your heirs if you get it wrong, so it is essential to take professional advice.
Inheritance tax is often described as a ‘voluntary tax’ since you can often take steps to lower the tax liability for your heirs. You should take advice on this as well as on how inheritance tax interacts with Spanish succession tax. Blevins Franks has a deep insight into both UK and Spanish taxes, and would guide you through the rules and the best solutions for your estate.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 19th of December, 2012.