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What are the UK’s inheritance tax rules?

This is the second of my series of articles where I have enlisted the help of my specialist private wealth and tax colleague Emma Read to explain what some of the legal consequences of moving to the UK may be for people, beyond the need to sort their immigration status.

People with assets in the UK need to be aware of inheritance tax. This tax is often referred to as the “death tax” but in some circumstances, inheritance tax liability can also be triggered while a person is still alive.

The tax concept of ‘domicile’ is different to immigration status and determines if your entire worldwide estate will be liable for UK inheritance tax, or just your assets situated in the UK.

What does it mean to be domiciled in the UK for inheritance tax purposes?

You will be domiciled in UK for inheritance tax purposes (or, more accurately, in the relevant component part of the UK, e.g. England, Scotland, Wales or Northern Ireland) if one of the following applies:

  1. You acquired a domicile of origin in the UK at birth (and this has not been displaced or has otherwise revived). Your domicile of origin is usually the same as your father’s domicile but may be that of your mother in certain circumstances.
  2. You have acquired a domicile of choice in the UK. This arises if both of the following two conditions are satisfied:
    • You are physically present in the UK; and
    • You intend to remain in the UK indefinitely.
  3. You are deemed domiciled in the UK.  You will be deemed domiciled in the UK if:
    • you have been tax resident (see previous article on tax residence) in the UK for 15 out of the 20 previous tax years; or
    • you were formerly domiciled in the UK and become tax resident in the UK again (you will remain deemed domiciled while you are considered a UK resident for one of the preceding two tax years).
  4. You have acquired a domicile of dependence in the UK. Children under 16 years of age cannot acquire a domicile of choice but instead acquire a domicile of dependence. This mirrors the father’s domicile if the parents are married or the mother’s domicile if the parents are unmarried or the father has died. If married parents separate, the child acquires the domicile of the parent with whom they reside (if the child resides between homes, they will retain the domicile of their father). 

Prior to 1974, the common law position of married women was that her domicile was that of her husband – that is, she acquired a domicile of dependence from him. For marriages that have taken place on or after 1 January 1974, a woman’s domicile is unaffected by the marriage itself and the aforementioned domicile rules will determine her domicile.

It is important to note that there are specific rules to determine the domicile of a US national married prior to 1 January 1974, to a man domiciled in the UK. When determining the wife’s domicile for UK tax purposes, the marriage is deemed to have taken place on 1 January 1974. In practice, this means that a woman who is a US national will be treated as never having had a domicile of dependence deriving from her UK national husband. The aforementioned rules will instead apply.

Will tax be charged when I die?

If you die domiciled or “deemed domiciled” in the UK then your entire world-wide estate will be subject to inheritance tax.

Even if you are not domiciled in the UK then your estate in the UK will be subject to inheritance tax.

All individuals are entitled to pass on up to £325,000 of assets free from inheritance tax on death, subject to deductions for any lifetime gifts made in the seven-year period prior to death.  This is known as the “nil-rate band”.  There may also be some other exemptions, reliefs or allowances available depending on, for example, the terms of your Will, your asset composition and personal circumstances.

Subject to these additional reliefs or allowances, inheritance tax would then usually be charged at 40% on the value that exceeds the relevant “nil-rate band”.

Will my estate be liable for inheritance tax?

Your estate’s potential liability to inheritance tax is specific to your personal circumstances and the available reliefs very much depend on a number of factors, including:

  1. Your marital status (and if you leave assets to your spouse);
  2. Whether or not you have children (and if you leave certain assets to them)
  3. The terms of your Will (if you have one);
  4. The composition of your estate (and whether any particular assets will attract any additional reliefs, such as business property relief or agricultural property relief)
  5. If you are able to claim enhanced nil-rate bands (such as the transferable nil-rate band or residence nil-rate band – this in itself is determined by factors such as your marital status, whether you have children, the value of your estate and the terms of your Will).

Due to the wide variety of factors which may affect how much inheritance tax may need to be paid, if you are concerned about your potential liability for inheritance tax then it is important to obtain advice that relates specifically to your circumstances.

What will my executors need to do after my death?

If inheritance tax is payable on death, your executors (the people responsible for administering your estate after your death) must submit an inheritance tax return to His Majesty’s Revenue and Customs, more commonly referred to as HMRC (the government body responsible for collecting taxes).

This inheritance tax return must be submitted within one year of the date of death, however any tax payable becomes due six complete months following the date of death. After this point, if the tax remains unpaid, interest will accrue on the amount outstanding.

Even if there is no tax to pay, your executors may still need to submit an inheritance tax return to HMRC in order to claim certain reliefs and additional allowances. Again, what is required will be very specific to your personal circumstances and the composition of your estate and so it is important to take advice if you are unsure or have concerns about this.

Does where I live in the UK affect how much inheritance tax I will pay?

No. Although different legal systems operate across the UK, and certain tax raising powers have been devolved from the UK Government to the devolved legislative bodies in Scotland, Wales and Northern Ireland, inheritance tax is not a devolved tax and the same rules apply across the entire UK.

Should I have a Will governing assets in the UK?

If you own assets in the UK, it is highly recommended that you put in place a Will which covers these assets.

Having a Will which covers your assets in the UK will ensure that these assets pass in accordance with your wishes, rather than in accordance with the rules of intestacy (i.e. how the law states that your assets should be distributed).

A properly drafted Will can also ensure that your estate passes in the most tax efficient way. The administration of a person’s estate in the UK is more straightforward if a Will that is drafted in accordance with English or Scottish law can be used to apply for Probate or Confirmation (the Scottish equivalent) after your death. Probate or Confirmation is the legal authority granted by the court to your executors enabling them to administer your estates after your death.

Should I put in place a Power of Attorney?

A Power of Attorney is a document in which an adult appoints someone else to make decisions or take action on their behalf.

If you require a Power of Attorney in Scotland, generally a Continuing and Welfare Power of Attorney would be put in place, while in England and Wales, Lasting Powers of Attorney would be put in place. Often, asset holders in the UK will not accept or implement foreign Powers of Attorney.

In Scotland and England and Wales, if a person loses capacity (the ability to make their own decisions, possibly due to illness), there is no one with the implied authority to take decisions on that person’s behalf. By granting a Power of Attorney, you are able to choose who you has the legal authority to make such decisions on your behalf in the event that you lose capacity.

If you do not have a Power of Attorney and someone needs to make these kind of decisions on your behalf, they may need to apply to the Court of Protection in England and Wales to be appointed as a deputy, or apply to the Sheriff Court in Scotland for a guardianship order. This can be a costly and time-consuming process. If you have a Power of Attorney, the requirement for your loved ones to go through this court process is eliminated.

The purpose of this article is to give an overview on the inheritance tax regime in the UK and other relevant succession planning considerations. It is not intended to provide specific legal advice and professional advice relevant to your circumstances should always be obtained.

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John Vassiliou

John Vassiliou is legal director and head of immigration at Shepherd and Wedderburn LLP. His profile can be found at: https://shepwedd.com/people/john-vassiliou.