Inheritance tax is defined by GOV.UK as the tax on an estate (the possessions, money, and property, just to name a few) of someone who has passed on. There are only two exceptions to not paying inheritance tax:
- If the value of the estate is below the threshold of £325, 000.
- If the deceased left everything above the £325, 000 threshold to either their spouse, a charity/ community amateur sports club, or civil partner.
The standard Inheritance Tax rate is 40%, and it is only charged on the part of the deceased estate that is above the £325,000 threshold. For example, if the deceased person’s estate is worth £500,000 and the tax-free threshold is £325, 000, the Inheritance Tax will be 40% of the £175,000 ( £500,000 less £325,000). It is also possible to pay Inheritance Tax at a reduced rate of 36% on some assets. However, this is only possible if the deceased left 10% or more of the net value to charity in their will.
In this article, I will offer advice on the UK’s Inheritance tax, especially to those living in Australia.
It is extremely important to note that UK Inheritance Tax (IHT) does not somehow disappear if you move to Australia or become an expat. You may ask, ‘Why is this so?’ The liability of an individual’s estate to UK Inheritance Tax is a function primarily of the individual’s domicile (place of permanent home) status in the UK rather than their residency. Anyone that is domiciled in the UK is liable to Inheritance Tax on their worldwide assets. For those that are not domiciled in the UK, they are only subject to IHT on the part of the estate located in the UK. These could range from bank accounts maintained in the UK to real estate located in the UK.
Under the tax law for adults in the UK, there are three different types of domicile:
- A Domicile of Origin – when a person is born, s/he gets the domicile which their father considered to be his permanent home at the date of your birth. If the parents were not married at the time of birth, then the domicile of origin is often the same as that of the mother.
- A Domicile of Choice – to acquire this, two requirements must be met:
- The individual must show that s/he has permanently settled in the jurisdiction in which s/he considers themselves domiciled.
- The individual has got to have the intention of permanently living there for the rest of their lives.
- A Deemed Domicile – an individual, is considered to be seen as a domicile in the UK if:
- The individual was a resident in the UK for 15 of the past 20 UK tax years, or
- The individual had their permanent home in the UK at any one time in the last three years of their life.
Mitigating UK Inheritance Tax as An Expat Living in Australia
An important aspect of UK Inheritance Tax when living in Australia, is that it’s generally a tax on people who fail to efficiently plan their estate tax. With a sufficient amount of careful planning and independent advice, it is possible to avoid a significant amount of inheritance tax in the UK, (legally of course).
There are two main methods for a person living in Australia to legitimately avoid the UK inheritance tax. The methods that will be mentioned below will also ensure that you get to pass on as much of your estate to your heirs as possible.
- Change your country of domicile away from the UK.
- Moving your estate into tax-efficient financial structures.
Reliefs And Exemptions
Some gifts that you give while still alive may be subject to tax after your death. However, this depends entirely on when you gave the gift. “Taper relief” is defined as a system of relief from tax on capital gains under which the total percentage of a chargeable gain considered to be taxable is decreased for each whole year that the vendor had the asset. When it comes to the UK inheritance tax, “taper relief” has the power to reduce the inheritance tax charged on the gift to less than the standard 40%.
If your estate includes a woodland or farm, it is important to contact the Inheritance Tax and probate helpline.
Another form of exemption from inheritance tax is that of Business Relief. It allows some assets to be passed on to heirs either free of inheritance Tax or decreased bills. It is possible to get Business Relief from 50% up to 100% on some of an estate’s business assets. These can then be passed on while the owner is still alive or as part of their will. When it comes to business relief, as the administrator or executor of the will, it is possible to claim relief when valuing the estate.
To claim relief, you’re expected to fill both:
- Form IHT400 (Inheritance Tax account), found here.
- Schedule IHT413 (Business or Partnership interests and assets), found here.
It’s important to note that you are required to use the market value of the asset or business when calculating relief at 50%. Business relief can be claimed on:
- Buildings and property
- Unlisted shares.
In conclusion, The UK inheritance tax does not have to be a draining process if done right. Be well aware of your domicile status as it influences the taxes that you will face. Take advantage of the reliefs and exemptions such as business and taper relief to determine if you qualify. Good luck!