Death and Taxes: UK Expat Inheritance Tax

As the old saying goes, nothing in life is certain but death and taxes. This is especially true for British expats abroad, many of whom mistakenly think that taking up residency overseas automatically exempts them from UK inheritance tax; unfortunately it does not. In this special report we take a look at UK inheritance tax laws and how they can impact British citizens living overseas.

Understanding Inheritance Tax

Inheritance tax (IHT) is a tax on the money and assets received by a beneficiary (also called a transferee or heir) from the estate of the person who died. At present IHT is 40% of the total value of an individual’s worldwide worth above a threshold of £325,000 (2010-2011).

All individuals who are deemed to be of a UK domicile status are subject to IHT on their full worldwide assets. Individuals who are of a non-domicile status are subject to IHT on any UK held assets.

Domicile Status NOT Residency Status

Living overseas and/or taking up permanent residency in a foreign country does not make an individual automatically exempt from inheritance taxation. Inheritance tax in the UK is determined by your domicile status, this is very different from nationality or residence. You are considered to be domiciled to a country if it is legally considered to be your homeland. By default, individuals are automatically awarded the same domicile status as their father at birth and this is referred to as their domicile of origin. Once they pass the age of 16 they can opt to choose their domicile status to their domicile of choice. This can only be done by establishing a permanent base outside of the United Kingdom.

Expat Inheritance Tax: Changing Your Tax Status

Many expatriates unwittingly consider themselves to be exempt from inheritance tax because they do not live in the UK and have not done so for some time. Even those who are aware of the importance of their domicile status quite often believe they have changes their domicile status when, in fact, they have not.

In order to prove a non-UK domicile status, expats are required to demonstrate that they have left the UK and have no intention of returning. This can be quite subjective and, when it comes to inheritance tax it is the opinion of the HRM revenue and customs that matters, not what the expats themselves think.

In order to prove that you have changed your domicile of choice you will need solid evidence that you have permanently taken up life in your host country. Examples of this may include the following:

  • Relinquishing your UK passport and taking up permanent residency in your host country.
  • Joining social organizations in your host country and severing all ties with social organizations in the UK.
  • Closing all UK bank accounts and selling any property or assets that you have in the UK.
  • Purchasing property in your new country of residence
  • Creating a will that is governed by the new country’s laws

British expats who wish to avoid paying IHT should always be aware of the fact that HRM Revenue and Customs will always go the extra mile to prove that you are still domiciled in the UK because the tax income is significant for them. In order to legitimately avoid this tax you should always seek expert advice about losing your UK domicile status and managing your finances.

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