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Inheritance Tax is a one of the taxes which many of us would rather not have to think about or even consider as it is a tax payable on an individual’s estate upon their death. Given the sensitivity of the subject, many individuals tend to put it to one side and sometimes it may be too late before any useful tax planning can be carried out to mitigate part / most of this liability. There is also a common misconception that if you are not resident in the UK, then you are not liable to UK IHT – this however is not entirely true. Here we take a broad look at where there is inheritance tax for non residents.
With other taxes in the UK (such as income tax and capital gains tax), if you are a non-UK resident, then broadly speaking, only the income and gains which you earn and realise in the UK in a given year will become subject to UK income and capital gains tax respectively.
With IHT however, things are somewhat different. This is because rather than looking at your actual residence status at the point the individual passes away, in order to determine the ineritance tax position on UK assets for non-residents, the UK government will consider whether or not you are UK domiciled or not.
Domicile is a legal concept which considers an individuals long term home. More information regarding domicile status can be found in our article ‘Isn’t Domicile the same as Residence?’.
Therefore, if you are UK domiciled as well as a non-resident at the time of passing, inheritance tax will be payable on your worldwide assets if the total value is over the inheritance tax threshold (which is currently £325k for individuals). The amount of tax payable will be at either the standard 40% rate or at a reduced rate of 36% if sufficient gifts from the estate are gifted to charities etc.
The above tax treatment of worldwide assets being included in your estate for IHT purposes is also true if you are UK resident and UK domiciled at the time of death.
If you are non UK domiciled and non UK resident at the date of death, then rather than your worldwide assets being subject to UK IHT, it will only be your UK assets that will form part of your estate which will be subject to UK IHT. Any Non-UK assets (although not subject to UK IHT) may well be subject to taxes in the county in which you reside and therefore we recommend you seek professional advice as required.
The anomaly to the above is that if you are non-UK domiciled but have been a UK resident for at least 15 of the last 20 tax years, then under HMRC’s revised rules, you will no longer be a non-domiciled individual for IHT, but rather a deemed UK domiciled individual. The consequence of this is that rather than just your UK assets being subject to UK IHT, by virtue of being UK deemed domicile, your worldwide assets will now fall under UK IHT and be subject to a possible 40% rate of tax.
In summary, although it is residence status that we need to consider for IHT, it is equally (if not more important) to also take into consideration domicile for UK IHT purposes.
As such, just like all other taxes in the UK, inheritance tax for non residents is something that needs to be carefully considered if you hold UK assets or are worried about your residency status.
Should you wish to speak with a taxation specialist regarding inheritance tax, domicile and residency issues or need advice on UK non resident tax rules then please contact Wisteria on 020 8429 9245 or email [email protected].
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