Inheritance Tax for UK & non-UK Domicile
Inheritance tax is the tax which is paid on an estate when the owner of that estate dies. The tax may also be payable on 1) life time gifts (PETs) made within 7 years before death and on 2) on trusts made during that person's life.
After death inheritance tax is paid by the executor using funds from the estate of the deceased.
Trustees with assets in a trust are usually responsible for the payment on inheritance tax in that trust and sometimes people may have to pay inheritance tax on gifts received.
Inheritance tax is payable based on the Domicile and not based on Residence.
Therefore many tax payers ask the following question:
"If I m UK resident but not UK domiciled does my spose and children will inherit my estate at the net of UK IHT or not?"
- The answer is as follows:
Wherever you are UK resident or non UK resident for tax purposes, but your domicile is UK domicile, then you will be liable for UK inheritance tax.
If you've got a non UK domicile status then only UK based assets will be liable to inheritance tax in the UK.
Legally speaking does not exist a definition of country of domicile, it will often be established based on where your father was born.
However, from 2017, non UK domiciles who have been UK-resident for more than 17 years of the past 20 years they will be deemed domiciled and will become liable to UK tax – including inheritance tax – on all overseas assets.
When it comes to determining your country of domicile, the tax man will interpret the conditions and draw their own conclusion about whether you are still domicile in the UK.
Due to inheritance tax being such a major revenue earner for the UK government, changing your domicile from UK domicile to somewhere else can be a difficult process.
Non UK domicile is subject to inheritance tax at the rate of 40% with a nil-rate band of £325,000 (2017-2018).
Non UK Domicile - VS - UK Domicile
Non UK Domicile
- has IHT rate at 40% - has Nil Rate Band at £325,000
- the spose is exempt from IHT for the assets inherited from the deceased, up to maximum £325,000
- has IHT at 40% and potentially can be reduced to 36%
- has Nil Rate Band at £325,000
- the spose is exempt from IHT for the assets inherited from the deceased for an unlimited amount
Some assets are exempt from IHT, like:
A business or an interest in a business = 100% exempt*
Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company = 100% exempt*
Unquoted shares, including shares listed on the Alternative Investment Market (AIM) = 100% exempt*
Quoted shares which give control of the company = 50% exempt*
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership = 50% exempt*
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the beneficiary = 50% exempt*
*The assets are not automatically exempt, a test must be run to see if asset meet the exemption criteria.
I hope you found this article helpful and if you have any question let me know.