UK Inheritance Tax & Estate Planning

Estate planning is a critical process that involves anticipating and arranging the management and disposal of an individual’s estate during their lifetime, in case of incapacitation, and after death. This planning not only includes the bequest of assets to heirs but also focuses on minimising taxes such as gift, estate, and generation-skipping transfer taxes.

Effective estate planning aims to reduce or eliminate uncertainties over probate administration and maximise the estate’s value by reducing taxes and other expenses. The ultimate goal is tailored to the specific objectives of the estate owner, which can range from simple to complex based on individual wishes and needs. Additionally, it often involves designating guardians for minor children and beneficiaries in case of incapacity, ensuring their protection and care.

The value of your estate is below the £325,000 threshold
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
If the global estate’s value is below the threshold you’ll still need to report it to HMRC.
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million.

INHERITANCE TAX RATES

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

Example: Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000). The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

RELIEFS AND EXEMPTIONS

Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%. Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

WHO PAYS THE TAX TO HMRC

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will). Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will. People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

WHEN SOMEONE LIVING OUTSIDE THE UK DIES

IF YOUR PERMANENT HOME (‘DOMICILE’) IS ABROAD, INHERITANCE TAX IS ONLY PAID ON YOUR UK ASSETS, FOR EXAMPLE PROPERTY OR BANK ACCOUNTS YOU HAVE IN THE UK.

It’s not paid on ‘excluded assets’ like

foreign currency accounts with a bank or the Post Office
overseas pensions
Holdings In Authorised Unit Trusts And Open-Ended Investment Companies

There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.

WHEN YOU WILL NOT COUNT AS LIVING ABROAD

The UK rules for determining when an expatriate is considered not to be living abroad, particularly in relation to inheritance tax and other residency matters, can be complex. Specific criteria pertain to situations where an expatriate may still be deemed domiciled or resident in the UK for certain legal and tax purposes:

Lived in the UK for 15 of the last 20 years:

This rule is related to the concept of “deemed domicile” for inheritance tax purposes. Under UK law, even if you have moved abroad and established a permanent residence in another country, you can still be considered domiciled in the UK for inheritance tax if you have lived in the UK for at least 15 out of the previous 20 tax years. This means that your worldwide estate may still be subject to UK inheritance tax.

Had your permanent home in the UK at any time in the last 3 years of your life

This rule is another way to establish deemed domicile for inheritance tax purposes. If you had your permanent home (also referred to as your “habitual abode”) in the UK at any point during the last three years before your death, you are considered domiciled in the UK for inheritance tax purposes. This means that your estate could be liable to UK inheritance tax on your worldwide assets.

DOUBLE-TAXATION TREATIES

Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived. Contact Horizon for more information about ways to mitigate inheritance tax and the products available to make sure you don’t pay too much or what you don’t need to. Source: https://www.gov.uk/inheritance-tax