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UK Inheritance Tax for Non-Residents
Real estate prices keep rising worldwide, continuously reaching all-time highs in the real estate markets all around the world.
The United Kingdom is not the exception. The British market grew at a 8.5% rate in 2020, the highest pace in seven years, with the average UK house now costing around GBP£260,000, even with the pandemic.
The average cost of a house is in London is over GBP£500,000
However, if you are thinking of expanding your portfolio by acquiring a property in the UK, it's important for you to know about IHT, which can substantially reduce the amount of money (up to 40%!) that your loved ones will receive when they inherit the property.
In this article we will explain to you everything you need to know about the United Kingdom Inheritance Tax, with special emphasis on Non-Residents.
UK Inheritance Tax: What You Need to Know
Inheritance tax is a type of tax paid by an individual who inherits an asset or money from someone who has passed away. The inheritance can be any asset- a property, a company, cars, bank accounts, etc.
In the United Kingdom, inheritance tax arises on UK assets held directly regardless of where you are domiciled or where you live. This applies for residents and non-residents. This tax is payable on the net value of the inheritance, including any gifts made seven years before the deceased passed away. The standard inheritance tax rate in the UK is 40%.
If you are domiciled in the UK, IHT will apply on everything you own worldwide. You may be deemed domiciled in the UK if you:
-Have been an UK resident in 15 of the last 20 tax years
-Have been domiciled in the UK in the last 3 years
-Were born in the United Kingdom and are returning there.
Since 2017, UK residential property interests are almost always subject to IHT even where indirectly owned e.g. through a company or partnership.
Some loans can be regarded as UK residential property interests.
Inheritance Tax Rates and Reductions
Like we told you above, the standard IHT rate in the UK is 40%.
This applies for nationals, foreign residents and non-residents with assets in the United Kingdom. Only a few percent of estates are large enough to be subject to IHT – about 1 in 20.
There are many exemptions that reduce the amount payable on the estate. We will tell you some reasons below
-If the estate value is less than GBP£325,000, then it will be below the exemption threshold. This threshold will remain the same at least until 2026.
-Spouses, charities and amateur sport clubs are not subject to IHT.
-Gifts given before the last seven years of the deceased’s life are exempt from IHT.
-IHT can lessen to 36% if at least 10% of the estate is left to charity.
-If the main property is left to children (adopted, stepchildren, etc.), the tax-free threshold rises to GBP£500,000.
-The UK has only 6 inheritance tax treaties in order to avoid double taxation but it does give some unilateral relief.
The IHT Threshold
Known also as the Nil Rate Band (“NRB”), the general inheritance tax threshold allows assets up to the value of GBP£325,000 to be exempt from IHT.
Another example is if the family home is left to a direct descendant i.e. children or grandchildren. In this case, the maximum threshold will be raised by a maximum of GBP£175,000 to GBP£500,000 (known as the Residential Nil Rate Band (“RNRB”)).
Also, if the assets’ value doesn’t exceed the NRB (£325,000) or RNRB (£500,000), any unused threshold may pass to the surviving spouse or civil partner.
Often this gives a GBP£1million exemption for the family.
Furthermore, IHT can be reduced to 36% (from 40%) if you leave at least 10% of the net value of the estate to charity.
How to Avoid the IHT?
There are some ways of getting reliefs and exemptions to avoid paying the UK Inheritance tax. We will explain you in detail some of the options below:
-Leave assets to your spouse or civil partner.
This is exempt from Inheritance Tax.
-Make a will. This option will not only ensure that all the assets will be distributed according to your wishes, because if you don’t, your assets will be distributed according British law standards.
It will also allow you to use some available reliefs.
-Keep your net assets below the IHT GBP£325,000 (or GBP£500,000 where relevant) threshold.
-Transfer your assets to your loved ones, so if you survive more than seven (7) years after the gift, transferred assets will be IHT exempt.
Even if you do not survive the 7 years, the rate may be reduced under taper relief.
-Move assets to a trust.
Specific advice should be taken in respect of this as there are many pitfalls for the unwary.
-Place UK assets (apart from residential property) into an offshore company.
-Leave to charity, as any money given to charity is not subject to IHT.
-Take out a life insurance policy to cover the IHT liability
As you may see, there is a wide range of options to reduce your potential IHT bill when the time comes.
Why Our Partners?
In order to help you to protect your inheritance in the United Kingdom, in Mundo we partnered with a British based firm. Our partners have a vast experience in providing a full range of special tax support and advice.
Their specialty is to help investors and businesspeople to plan their future wealth retention and manage their exposure to income tax, capital gains tax and inheritance tax, by developing a wide set of tools in order to optimize taxes and earnings.
Regarding Inheritance Tax in the United Kingdom, they are providing our clients a solution by giving all the advice needed to reduce the potential IHT bill when the time comes, by looking for legal options that best suit each particular case.
What Can We do for You?
In Mundo, our mission is to help our clients and their families in their pursuit of financial freedom. That’s why we have developed a wide net of experts that are perpetually looking for the best business opportunities and ways for tax optimization all around the world.
There is an extraordinary opportunity in the UK real estate market, with prices growing at an outstanding 8.5% pace just in 2020. However, if you want to invest there, it's important for you to know all the limitations and opportunities in that market.
That’s why we partnered with the best experts in the area. Our British-based partners will give you all the advice so you optimize your taxes and protect your inheritance.
Protect your legacy with Mundo Expert. Contact us now!Contact us
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