Inheritance Tax and Estate Planning
In the UK, IHT stands for "Inheritance Tax." It is a tax levied on the estate (property, money, and possessions) of a deceased person Domiciled for tax purposes in the UK when they pass away. The tax is also sometimes referred to as the "death tax."
When a person dies, their estate is assessed, and Inheritance Tax is applied if the value of the estate exceeds a certain threshold known as the "nil-rate band." Currently, the nil-rate band is £325,000. This means that any value above this threshold would be subject to taxation.
However, there are certain exemptions and reliefs available that can reduce the amount of Inheritance Tax payable. For example, gifts made to charities or gifts between spouses or civil partners are usually exempt from the tax. Additionally, there is a concept of "residence nil-rate band" introduced in April 2017, which can provide additional relief for individuals passing on their main residence (if UK resident) to direct descendants.
Inheritance Tax (IHT) in the UK is charged at a rate of 40% on the portion of an estate that exceeds the nil-rate band. The nil-rate band is the threshold below which no Inheritance Tax is due. At this time, the nil-rate band is £325,000 per individual.
To calculate the Inheritance Tax payable, you would need to follow these steps:
-
Determine the value of the deceased person's estate.
-
Subtract any debts, liabilities, and funeral expenses from the estate value.
-
Subtract the nil-rate band from the remaining estate value to find the amount subject to Inheritance Tax.
-
Apply the 40% tax rate to the taxable amount to calculate the Inheritance Tax payable.
Inheritance Tax and Estate Planning
Your estate will be subject to IHT if, when you die, if it exceeds the individual nil-rate band which currently stands at £325,000.
Calculating how much your family will have to pay is often, although not always, simple.
Count up the value of all the assets, subtract the nil-rate band and the Residence Nil rate Band (RNRB) if applicable and what is left will be taxed at up to 40% - paid for by your estate.
If your spouse dies before you without fully using their nil-rate band, the unused amount can be carried forward to use when you die.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’ as mentioned above.
The current residence nil-rate band is up to £175,000.
This means that if you give away the home you lived in before you died to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band) of its value if they sold it.
If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1,000,000 of your assets, including your property are free from IHT.
As with most things in life, it’s rarely as simple as the example we’ve given. There’s a lot of complicated rules and calculations to follow when you’re working out how much IHT your family will have to pay, but we’re here to help.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
In the United Kingdom, there is a concept called "spouse exemption" or "spouse relief" when it comes to Inheritance Tax (IHT).
This means that if one spouse or civil partner passes away and leaves their entire estate to the surviving spouse or civil partner, no IHT is typically payable on the estate, regardless of its value.
This is due to the fact that transfers between spouses or civil partners are generally exempt from Inheritance Tax, regardless of the amount involved.
The idea behind this exemption is to ensure that assets can be passed on to the surviving spouse or civil partner without being subject to a tax that might create financial difficulties during an already challenging time.
Tax domicile, also known as tax residency, refers to the country or jurisdiction where an individual or entity is considered a resident for tax purposes. Being a tax resident in a particular country means that you are subject to that country's tax laws and may be required to report and pay taxes on your worldwide income and assets to that country's tax authorities.
Tax domicile is typically determined by specific rules and criteria set by each country's tax laws. The rules can vary significantly between countries, but some common factors that can establish tax domicile include:
-
Physical presence: The number of days you spend in a country during a tax year may be used to determine tax residency.
-
Permanent residence: Owning a home or having a permanent place of abode in a country can establish tax residency.
-
Economic ties: Significant economic interests, such as employment, business activities, or investments, in a country can contribute to tax residency.
-
Family ties: Family connections, such as a spouse or dependent children residing in a country, can be a factor in determining tax domicile.
-
Intentions: Your declared intentions and future plans regarding residence can also play a role in determining tax residency.
Tax domicile is essential because it determines the tax obligations of an individual or entity and affects which country has the right to tax specific types of income and assets. It is crucial to understand the tax rules of each country in which you have significant connections to ensure compliance with tax regulations and avoid any potential double taxation issues.
Additionally, tax domicile can have implications for estate planning and eligibility for certain tax benefits and deductions in a specific country.
-
Your domicile is a legal concept that determines the country where you have your permanent home and which laws apply to your estate after death. It's an important factor in UK tax law, particularly for Inheritance Tax (IHT).
Types of Domicile:
-
Domicile of Origin – Acquired at birth, usually based on your father's domicile.
-
Domicile of Choice – You can change your domicile if you move to another country with the intention of living there permanently.
-
Deemed Domicile – Even if you aren't domiciled in the UK, you can be treated as deemed UK-domiciled if you've lived in the UK for 15 out of the last 20 years or if you were born in the UK with a UK domicile of origin and later returned.
How Domicile Affects Inheritance Tax (IHT):
-
If you are UK-domiciled, your entire worldwide estate is subject to UK IHT at 40% on the value above the tax-free threshold (currently £325,000).
-
If you are non-UK domiciled, only your UK assets are liable for IHT. Non-UK assets are excluded unless you are deemed UK-domiciled.
Understanding your domicile status is crucial for effective estate planning, especially if you have international ties or are an expat. Proper planning can help reduce your estate’s exposure to UK IHT and ensure your assets are distributed according to your wishes.
-
We would always recommend that you take a legal tax opinion from a suitable 3rd party at the time of planning on your estate, we can also assist you with this process. Taking a tax opinion is important for several reasons:
1. Avoiding Costly Mistakes: Estate planning involves complex tax laws, especially when dealing with Inheritance Tax (IHT), capital gains, or income taxes. A legal tax opinion ensures you understand how these taxes apply to your assets and prevents unintended tax liabilities for your heirs.
2. Maximizing Tax Reliefs and Exemptions: Legal experts can help you take advantage of available tax reliefs and exemptions, such as the Nil-Rate Band (NRB), Residence Nil-Rate Band (RNRB), and exemptions for spousal transfers. Proper structuring can help reduce the tax burden on your estate.
3. Managing Cross-Border Assets: If you have assets or family members in multiple countries, tax rules can vary widely. A legal tax opinion helps ensure compliance with international tax treaties and reduces the risk of double taxation on your estate.
4. Tailored Advice for Complex Situations: Every estate is unique, particularly if you have trusts, businesses, or significant wealth. A tax expert can provide personalized advice on the best strategies for asset protection and wealth transfer.
5. Domicile and Residency Rules: Understanding your domicile status is key for determining how your estate will be taxed, especially for expats or those with foreign assets. Legal tax advice ensures your estate is planned efficiently in light of these rules.
6. Complying with Changing Legislation: Tax laws are frequently updated. Professional advice ensures your estate plan is aligned with the most current regulations, helping you avoid unexpected penalties or liabilities.
7. Protecting Beneficiaries: Proper estate planning can shield your beneficiaries from excessive tax obligations, preserving the value of the inheritance and ensuring it is distributed according to your wishes.
By obtaining a legal tax opinion, you ensure that your estate is structured in a tax-efficient manner, avoiding unnecessary complications and maximizing the value passed on to your loved ones.
Pension Wise
Pension Wise is a free, impartial government service for anyone aged 50 or over, with a UK based personal or workplace pension.
It can help you understand what type of pension you have, how you can access your savings and the potential tax implications of each option. But it isn’t financial advice.
Ask our Advice
Our team are ready to answer your questions.
Call us on 0034 951 122
Opening hours:
Monday - Friday: 9am - 6pm (CET)
Saturday: 9.30am - 12.30pm (CET)
