Increasing Number of Families Trapped in the UK Inheritance Tax Web …in the UK and abroad
In recent news, UK inheritance tax (IHT) receipts continue to break records in the 2022/23 tax year – and this is a cause of concern for families and heirs. With HMRC collecting an additional £1 billion last year, totalling £7.1 billion, and the number of taxpayers increasing by 24% to 41,000, the government anticipates further growth, projecting £38 billion in revenue over the next five years.
British expatriates are particularly affected by this tax, as liability is based on the domicile or situs of the asset, rather than residence.
In this article, I explore the reasons behind the surge in IHT, frozen reliefs, rising property prices, and offer some advice on how to protect your family assets.
Frozen Reliefs and Rising Property Prices:
The stagnant standard inheritance tax nil rate band at £325,000 since 2009, set to remain unchanged until April 2028, has contributed to more estates falling under the IHT umbrella. As property prices have risen steadily during this period, other assets have also increased in value, resulting in a growing number of families being subjected to a tax that was initially intended for the wealthy. Although the residential nil-rate band, introduced in 2017, initially started at £100,000 and increased to £175,000 in 2020/21, it is now frozen until 2028.
Currently, when combined with the standard £325,000 allowance, couples can potentially pass on up to £1 million tax-free, or £500,000 for individuals. However, it’s important to note that the residential nil rate band only applies to a primary residence passed down to children and grandchildren if the estate’s value is below £2 million. For higher-value estates surpassing £2.35 million, the residential nil rate band is phased out entirely through a tapering system.
Determining UK Inheritance Tax Liability:
UK inheritance tax applies to both death and lifetime gifts. UK domiciles are subject to tax on their worldwide estate, regardless of the residence of the individual or recipients. Non-UK domiciles, on the other hand, are assessed only on their UK-situated assets. The tax liability encompasses all assets such as property, savings, investments, insurance policies without trust, household contents, jewellery, vehicles, and more. Mortgages and loans are typically deducted from the estate’s total value.
If the total value of an estate falls below the combined allowances (£325,000 + £175,000 for the main home), heirs are not required to pay inheritance tax. However, if the estate exceeds these thresholds, a 40% tax rate applies to the excess amount. Any unused allowances from the first death or partially used allowances can be transferred to the surviving spouse or civil partner, emphasising the importance of structuring one’s estate to maximise these benefits.
Expatriates and the Domicile Issue:
UK inheritance tax continues to follow British expatriates worldwide as long as they retain UK domicile status. Changing one’s domicile can be a complex process, requiring severing ties with the UK and adopting a domicile of choice in the new country of residence. However, it may take up to four years to shed a UK domicile status for inheritance tax purposes. Failing to correctly determine one’s domicile status can result in an unexpectedly large tax burden for the family. Seeking professional advice is crucial to navigate this complex area.
Inheritance Tax Planning:
Often referred to as a voluntary tax, inheritance tax offers various planning opportunities to minimise or eliminate the liability for families and heirs. It is advisable not to postpone action, especially when considering lifetime gifts or potentially exempt transfers. For individuals subject to inheritance taxes in multiple countries, like many British expatriates in Spain, cross-border estate planning can be challenging. Once again, getting specialised advice is essential to ensure optimal outcomes and take advantage of available planning opportunities.
Help is available:
The UK inheritance tax continues to affect more families each year, necessitating proactive measures to safeguard family assets. With record-breaking tax receipts and an increasing number of taxpayers, it is crucial to understand frozen reliefs, rising property prices, and the implications of domicile. By seeking professional advice and engaging in inheritance tax planning, individuals can navigate the complexities of the tax system, minimise tax liabilities, and protect the wealth they intend to pass on to their loved ones.
If you’re concerned about the increasing reach of UK inheritance tax and its potential impact on your family’s financial security, I am here to help. With my extensive knowledge and expertise, I can guide you through the complexities of the tax system, identify opportunities to reduce your tax liability, and ensure your loved ones receive the maximum benefits from your estate.
Contact me today, Sally – The Inheritance Guru on 07831 379562 or by emailing [email protected].