Inheritance Tax U-Turn: Expats Must Plan Ahead
Contributed by Sovereign Group
13 June, 2013
Contributed by Sovereign Group [SovereignGroup.com]
David Cameron recently reneged on the Conservative Party's pledge to reform the inheritance tax system. British expats should be on their guard.
Many readers of The Telegraph Weekly World Edition may have noticed the following passage in Issue 1,125:
George Osborne, the Chancellor, will announce that the level at which inheritance tax becomes payable will be frozen at £325,000 until at least 2019 to fund reform of the social care system.
Before the election, the Conservatives had pledged to increase the inheritance tax limit to £1 million with both Mr Osborne and David Cameron saying that the right to pass on untaxed assets was a most basic human instinct.
That little non-change could cost some families £270,000. Expats may think that they need not be concerned. They would be wrong.
Most UK expatriates fail to realise that they remain domiciled in the UK and therefore subject to UK inheritance tax (IHT) even if they have lived abroad for many years. IHT is charged at a rate of 40pc of the amount by which the total value of their worldwide estate exceeds the nil rate band of £325,000 mentioned above (or 650,000 per married couple).
There is an exemption from the tax for transfers between spouses but only if they are both domiciled or not domiciled. This catches many expats who have married foreign spouses. The exemption only delays the tax which then bites on the death of the survivor and often comes as a nasty and very costly surprise to the family of a deceased UK expatriate.
Collection of IHT is generally quite simple for HMRC. Most expats will have assets in the UK. Many will have made a UK will. Probate is the process whereby the executors are granted permission to take over the assets of the deceased and distribute them to the heirs named in the will. A grant of probate cannot be given without a tax clearance and payment of any IHT due.
Even the estates of expats which contain no UK assets may still face an IHT claim. Tax treaties and other international agreements contain clauses under which foreign governments are duty bound to help collect tax and may well mean that a death abroad gets reported back to the UK. Expats would be foolish to hope they dont get noticed. They would be wise to plan.
So what should a UK expat do? First and foremost they should check their domicile to see whether they need to be concerned. Under UK law a person must have a domicile but cannot have more than one. A person will usually take his father's domicile at birth. This is the Domicile of Origin. After the age of 16 a person can obtain their own Domicile of Choice by establishing a new permanent home.
Many UK expats go abroad to work or live for a temporary or indefinite time and intend to return to live in the UK at some stage in the future. If they do intend to return to the UK to live they will remain UK-domiciled even if they have lived abroad for many years.
Others have no intention to return to the UK but move from place to place so do not establish a new permanent home outside the UK. Others do not cut their ties with the UK sufficiently to lose their domicile of origin even though they have been abroad in one place for many years. All of these will remain UK-domiciled.
The legal test of domicile is one of intent alone. If the expat has established a new permanent home in another country and intends to remain in his new country indefinitely he or she will have established a new domicile. HMRC would look for this intent to be evidenced by a show of real commitment to the new country. They look for factors such as, the purchase of a house; taking steps to become a national/permanent resident of and a long period of residency; establishment of a business and other financial ties; establishment of social, religious and political ties in or with the new country; disposal of the family home in the UK; ownership of a burial plot in and making ones main will under the law of the new country; education of children in the new country; relinquishing the right to vote in the UK and taking up such rights in the new country; severance of business and social ties within the UK.
Unhelpfully HMRC will not give rulings on domicile or give any indication of what they think about a persons domicile. If an expat were to write to HMRC outlining their facts and circumstances and asking them whether they think they were domiciled or not they either wont reply or will just tell them to consult a tax expert. What a service!
It used to be possible to force a ruling by filing a return reporting a "chargeable transfer" and forcing them to decide on the matter. This was done by transferring an amount in excess of the lifetime and annual exemptions - say £400,000 - into a discretionary trust. The excess is taxable at 20pc if the transferor is domiciled. If HMRC agreed no tax was due they had effectively agreed that you were no longer domiciled in the UK.
HMRC were reluctant to give these rulings and many who had gone to the trouble of making and reporting the chargeable transfer waited many months or even years for a reaction. Now HMRC refuses to react at all unless there is considerable tax at stake. Again unhelpfully, HMRC wont confirm how much that is. Suffice it to say that it is a lot and the risk is not unacceptable so this procedure is no longer recommended. The alternative is to obtain counsel's opinion. This can be done quickly and relatively cheaply.
Once a new domicile has been obtained, UK IHT liability disappears on all but UK assets. It is relatively easy to convert UK assets into non-UK assets and eradicate UK IHT on those as well. Be aware, though, that just because UK IHT may not apply there may still be liability to IHT or estate duty in the new country and individual assets may be subject to IHT in their country of situs.
And there is an additional danger. UK IHT no longer applies only for as long as that new domicile is retained. If for any reason the non-dom moves country it is often the case that the new foreign domicile is lost and the UK domicile of origin is revived. The good news is that anything transferred into trust remains outside the scope of IHT so standard planning is to transfer as much as possible into trust immediately after obtaining opinion. This should get rid of IHT forever. However transfers into trust would attract a lifetime IHT charge of 20pc if the transferor is domiciled. Hence the need for certainty on this issue.
For those expats who are still domiciled, there are other strategies available. If all assets are given away at least seven years before death there would be no IHT. Most, quite understandably, dont want to do this as they would then have to rely on family to maintain them for the rest of their lives.
Transferring all assets to a family limited company can eradicate IHT. With such companies the donor of the assets would normally keep the voting and income shares so he can control the company and maintain himself but would give away the capital shares seven years before death, removing value from his estate. A transfer of assets to a qualified non-UK pension scheme (QNUPS) also removes assets from the estate as long as this is done to provide a bona fide pension income rather than as part of an IHT plan.
One way or another its best to know where you stand and plan appropriately. To a certain extent it is true to say that IHT is one of the easier taxes to plan against but it is necessary to start planning early. The Chancellor has just clarified the need for even those of relatively modest wealth to pay attention if they want their family to benefit from their lifetime of work rather than HMRC.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
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