There is no tax like Inheritance Tax. It arouses animosity in many people, especially when it has ensnared many families in its ever expanding net. So no surprise that many people loath the tax. Over the last year more than £5 billion was collected from the inheritance tax alone. For expatriates Inheritance Tax can be even stickier to understand your position in line with UK inheritance tax, but with rates of 40% and above it pays to understand your situation and options.
Even if you have been living abroad for many years, it is still highly likely you are considered to be a UK –domicile, which brings you into the battlefront of inheritance tax. The UK inheritance tax department will stick their jagged little fingernails into anything that could suggest you have intentions to return to the UK one day; this could be any assets you own in the UK, such as property, burial plot or even a car.
While it isn’t impossible to adopt a domicile of your choice in Portugal, you will have to eliminate all ties with the UK, domicile law is extremely complex. Furthermore, a new rule that has been implemented by the UK suggests that even returning to the UK for a proportionately meagre period- such as a family member is ill ect – could in fact result in inheritance tax liability for non-domiciles coming into effect. As for those who are UK domiciles, UK inheritance tax applies to your entire estate, not just UK assets, and not just property. They will take a cut of your entire assets across the globe. Even those who are not UK-domiciled, any British assets attract UK inheritance tax. This includes all UK residential property.
A tax relief was introduced in April 2017; the ‘residential nil-rate band’ or ‘family home allowance’ this provides extra relief when passing on a main home to your direct descendants. The good news for expatriates is you can claim this allowance on a property outside of the UK, provided it is your main residential home (although local inheritance taxes may still apply). To be eligible for this allowance, your property must be seen to be your main residential property. Investment properties are not included, and it is only available for one property that is passed directly to children or grandchildren. Larger estates on the other hand, do not receive the full tax relief – estates over £2 million have a smaller tax relief and those £2.2 million and above receive no tax relief.
Despite the tax allowance, the government’s inheritance tax funds continue to swell. The reason behind this has a lot to do with people’s increasing value of assets – in particular property. As house prices have risen, the number of estates that have fallen outside the governments “residential nil-rate band” have increased substantially. Currently residential property makes up a third of estates liable for inheritance tax.
Additionally, the standard relief – frozen at £325,000 since 2009 and fixed until 2021 – has not kept pace with inflation unlike property and other assets. The UK government’s Office for Budget Responsibility predicts the inheritance tax haul will surpass £6 billion by 2021 as people’s asset continue to grow and standard relief is frozen.
However, there are ways to mitigate UK inheritance tax other than gradually transferring (or spending!) your wealth within your lifetime. deVere’s adviser who are specialist, cross-border expertise can help you establish your domicile status and how UK inheritance tax interacts with Portuguese stamp duty. With good planning, you can structure your wealth to take advantage of all reliefs available and ensure you don’t leave your beneficiaries with an unnecessarily large tax bill.