Tax and Estate Planning

A Guide to UK Inheritance Tax if You Live Abroad

Are you planning for retirement abroad? Moving abroad can mean many things to your finances. What happens to your inheritance is one such important thing to consider. Do the same UK inheritance tax rules apply if you live abroad?

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A Guide to UK Inheritance Tax if You Live Abroad
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Are you planning for retirement abroad? Moving abroad can mean many things to your finances. What happens to your inheritance is one such important thing to consider. Do the same UK inheritance tax rules apply if you live abroad?

Liability to UK inheritance tax depends on your domicile status

The first thing you need to understand is whether you are considered domiciled in the UK for tax purposes or not. The answer lies in how long you’ve lived abroad and if your permanent home is abroad.

You will be domiciled in the UK if you:

  • Have lived in the UK for 15 of the last 20 years.
  • Had a permanent home in the UK at any point during the previous three years. Permanent residence in this context means the place regarded as your 'homeland'. It shouldn't be confused with residency, which refers to the location you spend most of your year in.

If neither of these conditions applies to you, then you are considered to have domiciled abroad.

When your permanent home is abroad, you won’t have to pay inheritance tax on your foreign assets. Your foreign pensions, income and assets, such as property and savings, won’t be subject to inheritance tax.

You shouldn’t expect that just because you’ve moved abroad, your domicile tax status is now changed. It’s worth talking to an advisor about your tax status before moving abroad.

UK assets remain liable to inheritance tax

While your foreign assets won’t be subject to inheritance tax, you will remain liable to pay tax on your UK assets. Any property or bank accounts you have in the UK are taxable assets even if your permanent home is abroad.

It’s important to note how all UK property falls within the UK inheritance tax rate. The rules changed in 2017. Before the change, UK inheritance tax generally didn’t apply to residential property owned through a corporate structure. Now, property ownership models do not matter. All UK residential property is subject to tax.

Certain assets are excluded from UK inheritance tax, however. These include:

  • Foreign currency accounts you have with a bank or the Post Office.
  • Any overseas pensions you are receiving.
  • Any holdings you have in authorised unit trusts and open-ended investment companies.

The above might differ if you have assets in a trust or government gilts. You’ll also be treated differently for tax purposes if you are a member of visiting armed forces.

You should also note that if you are inheriting UK assets when living abroad, then you might be subject to paying inheritance tax. You have to pay tax on inherited assets if both of the following conditions apply to you:

  • The property, money or shares are UK assets.
  • The deceased’s estate cannot pay the Inheritance Tax.

If you are a non-resident inheriting UK property or land, then you will have to pay tax on any gains you make when selling it. You do not have to pay tax on other assets, such as UK shares.

Are UK inheritance tax rates same if you live abroad?

Inheritance tax rates are the same, whether you live abroad or not. If you are liable to pay Inheritance Tax, then the following rules apply:

  • Tax is due on estates valued at over £325,000.
  • The standard inheritance tax rate is 40% on the amount above the threshold.
  • You don’t pay tax on anything above the £325,000 threshold if you leave the assets to your spouse, civil partners, a charity or a community amateur sports club.
  • If you give your home to your children or grandchildren, the threshold can increase to £500,000 due to £175,000 property allowance.
  • You can use the allowance on property outside the UK if the property is your main home. Be aware that local inheritance taxes could apply.
  • You can pass on your unused threshold to your spouse or civil partner. This can double their available threshold to £650,000.

If you have UK property, you can find ways to reduce your Inheritance Tax bill on our two-part series. You can find Part One here and Part Two here. For most people, the property usually ends up tipping the value of the estate above the threshold. It’s worth keeping an eye on your property valuations to allow for more effective tax planning.

You should also read our post on Inheritance Tax and cash gifts. It’s crucial to know that some gifts you give while alive might be taxed once you are deceased.

Who pays the tax to HMRC?

When you die, the assets you leave behind will form an estate. The funds from the estate will pay for any Inheritance Tax you might own. The responsibility to pay the tax falls on an ‘executor’ or the person dealing with the estate.

Your beneficiaries usually don’t need to pay tax on things they inherit. However, they might be subject to related taxes. For example, if you leave behind property with rental income, the income will be subject to Income Tax.

Check your tax reclaim options

If you find yourself in a situation where inheritance tax is charged by both the UK and the country you live in, you could have the option to reclaim the tax. Countries have double-taxation treaties to avoid the taxation of the same assets twice.

You can find information on the countries that have a double-taxation treaty with the UK on the Government website.

You might be entitled to Unilateral Relief in a situation where a double-taxation treaty is not applicable, and the asset is deemed taxable by both countries. Unilateral Relief is a credit against inheritance tax.

If you have any questions regarding your specific tax circumstances, you can call the HMRC helpline at +44 300 123 1072.

Planning for inheritance tax is essential, no matter where you live. If you are planning a move abroad after retirement, then it's a good idea to explore how it might impact your finances.

Speak to a qualified financial advisor or contact HMRC if you are unsure about your specific tax situation.

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