A Beginner’s Guide to UK Inheritance Tax
Background
UK Inheritance Tax (often referred to as IHT) operates within a complex framework of factors, clauses, exemptions and exclusions. In this guide, we outline the fundamentals of IHT and explain how tax liability can vary greatly depending on individual circumstances.
Who is Subject to UK Inheritance Tax?
The estate of any person domiciled in the United Kingdom is subject to IHT, irrespective of their last place of residence.
Residence vs Domicile
Residency refers to the country where a person is currently living or residing. On the other hand, Domicile usually refers to one’s home country or the country which they consider their real home, even if they are currently residing in another country.
What does this Mean?
This means that the estate of a UK domiciled person will remain liable to UK Inheritance Tax for as long as they remain domiciled within the UK.
UK Inheritance Tax Rate
UK Inheritance Tax is calculated at a rate of 40% of the value of the estate that exceeds £325,000. Any estate valued under £325,000 will not be subject to IHT.
Example: Calculation of IHT on Estate Valued at £1,000,000
£1,000,000 – £325,000 = £675,000
40% x £675,000 = £270,000
Total UK Inheritance Tax liability: £270,000.
How is the Value of the Estate Calculated?
UK Inheritance Tax is charged on worldwide assets. This means that even property situated outside the UK is considered as part of the estate for the purposes of calculating IHT.
Transfers of assets or wealth made during the last seven years of life are also subject to IHT and thus, included in the estate’s value for calculating IHT.
The Spousal Exemption
Spouses (or partners within a civil partnership) are permitted to transfer assets between themselves, whether inter vivos (whilst alive) or causa mortis (on the death of one of the spouses) without any IHT liability.
The only limitation to this exemption is that the spouse/partner receiving the assets must be UK domiciled.
Assets transferred through the Spousal Exemption are excluded from the valuation of the estate for the purposes of calculating UK Inheritance Tax.
Other Exclusions
The following assets may also be excluded from the estate for the purposes of calculating IHT in certain circumstances:
- Agricultural properties (partly exempt);
- Trading commercial businesses (partly exempt);
- Any gifts made at least seven years prior to death (exempt).
UK Inheritance Tax for Non-Doms
The estate of a Non-Domiciled UK resident is only subject to IHT on assets situated or held within the UK.
Rate of UK Inheritance Tax on Non-Doms
In this case, IHT is calculated at a rate of 40% on the value of UK-based assets exceeding £325,000.
UK Inheritance Tax – A Voluntary Tax?
In the financial advisory sector, UK Inheritance Tax is sometimes viewed as a voluntary tax because there are numerous legal and compliant strategies available to significantly reduce or even eliminate IHT liability.
Can I Change my Domicile?
Many UK Expats explore the option of changing their domicile to avoid UK Inheritance Tax. Malta is a popular destination for re-domiciliation as it does not impose an inheritance tax equivalent to the UK’s IHT.
How can Zeta Assist?
Here at Zeta, we specialize in helping individuals navigate the complexities of UK Inheritance Tax (IHT). Our team of experienced professionals is well-versed in providing tailored relocation services to individuals seeking to transfer their domicile to more tax-efficient jurisdictions. Our team also focuses on structuring comprehensive, tax-efficient strategies aimed at minimizing potential tax liabilities.
Whether you are exploring domicile options or looking for ways to reduce your tax exposure, Zeta is here to guide you through every step of the process, ensuring your estate is managed effectively and in compliance with legal standards.