Expat Inheritance Tax Planning
Expat inheritance tax planning can sometimes be described a “voluntary tax”. This is because an an expat with careful tax planning you can reduce or avoid paying Inheritance Tax (IHT). Inheritance tax (IHT) is payable at 40% on the value of your estate on death. But why should the taxman take some of your assets when you die – especially since you have probably already paid income tax on the money earned to buy them and capital gains tax on any profits.
There are ways to reduce the amount of inheritance tax you have to pay. This guide explains how the tax is levied and some of the tax saving options available to you, also how you might keep your payment to a minimum.
There is a famous saying by Benjamin Franklin “the only two certainties in life were death and taxes”. When it comes to inheritance tax, the two things collide.
What Is Inheritance Tax and do Expats Overseas Pay it?
Inheritance tax, or (IHT) as it is commonly known by British people is payable on everything you have of value when you die, including:
- Investment Property
- Savings and investments
- Works of art
- Your home
- Any other properties or land based overseas.
It’s payable on death of the second spouse if you are married or also whats know as civil partner. But there are certain circumstances, if you put assets into certain types of trusts, for example, when (IHT) becomes payable earlier. All of your assets when you die become known as your estate. If you leave assets to your spouse or civil partner they are exempt from (IHT) until the death of the spouse. If your spouse does not hold a UK passport and are from overseas the IHT will be paid on the death of the first spouse on anything over £325,000. This figure has been frozen for tax years up to and including 2020/21. The simplest reasoning for this is the second spouse could disappear overseas with the remainder of the estate and HMRC would never be paid what they were owed.
All individuals receive a Nil Rate Bank for (IHT) of £325,000. There is a big misconception that non UK residents that hold property in the UK are exempt from IHT as they are outside the UK. What they dont realize is that any property assets that are left after deducting the mortgage balance and NIL Rate Band of £325,000 is liable for tax at 40% which will be paid from the estate of the property holder before any cash is released to their lawyers in their home country.
Nil Rate Band Increase on Inheritance Tax
6th April 2017 saw an increase on the residence nil rate band which is in addition to the standard nil rate band This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant. So along with the £325,000 there is an additional increase over the years 2017 to 2021. The increase in property values has probably contributed to this increase as property values have climbed so high over the last 10 years. By 2021 the total nil rate band with be £1m between married couples and spouses. Unlike the standard nil rate band, it’s only available for transfers on death. If spouses or civil partners don’t use the residence nil rate band on first death – even if this was before 6 April 2017 – there are transfer-ability options on second death
£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021
Gifts and Exempt Gifts
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income such as Christmas or birthday presents. These are known as ‘exempted gifts’. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently. People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death. Gifts that are made during a persons lifetime that are not exempt transfers will be taxed according to IHT rules. Any gifts made between three and seven years before death could qualify for the 7 year rule (taper relief) which reduces the amount of IHT payable.
The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die. Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’. The relief works on a sliding scale and is given against the amount of tax you’d have to pay rather than the value of the gift itself. The value of the gift is set when it’s given, not at the time of death.
Years between gift and death
- Less than 3 Years – Tax Rate 40%
- 3 to 4 Years – Tax Rate 32%
- 4 to 5 Years – Tax Rate 24%
- 5 to 6 Years – Tax Rate 16%
- 6 to 7 Year – Tax Rate 8%
- 7 or more – Tax Rate 0%
Gifts are not counted towards the value of your estate after 7 years
Writing a Will and Deed Of Guardianship For Expat Families
One of the most important things you can do to help reduce the amount of IHT you’ll have to pay, is write a will. A Will is the instrument by which money, real estate, and personal property are distributed after your death. It is also how you formally appoint guardians to look after your children if something happens to both parents. If you are an expat family with no relatives in Hong Kong, appointing guardians and temporary guardians for your children is the number one vital reason to arrange drafting of your Wills. In the event of both parents passing away If there is no evidence of guardians being appointed, whether in a Will or in a formal Deed, a local court in Hong Kong is convened as soon as possible and the children are made wards of court in that country. At that point the State takes responsibility until a guardian is found. If no suitable person is available or willing to take on the responsibility, the orphaned child or children remain wards of court and the State will remain in charge of their well-being for the rest of their childhood years. If both sets of grandparents apply to the courts to be appointed the legal guardians, there is the possibility of a major family rift if they cannot agree. The legal rights are actually with the father’s family if the couple is married. Whichever way the court decides it will not award the children to either set all the time there is a dispute raging on. At the end of the process two sets of grandparents will be at loggerheads and that is a situation, which will benefit nobody, least of all the children.
Keeping your will up-to-date
You need to keep your will up-to-date. Getting married, divorced or having children are all key times to review your will. If the changes are minor, you could add what’s called a codicil to the original will. This is a document which can have the effect of making small amendments to your original will. You should consult a solicitor before doing this. If they’re major, consider writing a new one.