There are some common misunderstandings about Inheritance Tax.
UK Inheritance Tax (IHT) is a tax levied on the estate (money, property and possessions) of a person who has died – or in certain circumstances where lifetime gifts have been made, as outlined in myth 4 below. It affects anyone who is deemed domiciled in the UK and / or owns non-excluded assets in the UK.
As you may or may not be aware, some changes have been announced recently to the way IHT will be calculated. A new main residence nil-rate band of £100,000 has been introduced from April 2017, increasing each year up to £175,000 in 2020. Whilst this move will come as a relief to a good many individuals, eligibility will depend on individual circumstances and not all will be able to benefit from it. IHT remains a threat to many estates and it is a tax about which there remain many misconceptions.
Myth one: UK Inheritance Tax doesn’t apply to me now I’ve moved abroad
UK Inheritance Tax is applicable to your worldwide estate if you are deemed domiciled in the UK, even if you are no longer living there.
Two special rules apply to those who have emigrated from the UK: the three-year rule, and the 15 out of 20 rule. If an individual’s permanent home was in the UK at any time in the three years before they died, or if that individual had been resident in the UK for at least 15 of the 20 tax years up to their death, then, in most cases, they would be treated as domiciled in the UK for purposes of Inheritance Tax. These rules are expected to be confirmed in the finance bill.
HMRC only recognises a change of domicile if there’s strong evidence that someone has permanently left the UK and intends to live abroad indefinitely. Even if the individual remains non UK resident, they will revert to their domicile of origin if they become resident in another country.
Myth two: UK Inheritance Tax doesn’t apply to me as I am not a British citizen
If you own assets in the UK (except excluded assets), regardless of your residency, nationality or domicile, your estate will be subject to UK Inheritance Tax on your death, or on gifts made during your lifetime.
Myth three: There is only one tax rate for UK Inheritance Tax – 40%
Actually, there are three rates applicable to the estate: 40%, 36% and 0%. The 0% rate, or ‘nil rate’ (which is different to an exemption), applies up to £325,000 per person, a level which the government has frozen until April 2021. UK IHT is a cumulative tax, so all gifts made in the seven calendar years preceding an event (normally death) count towards this total.
Once you breach that ‘nil-rate band’, you will pay 40% on the remainder.
The Budget in 2011 added a new band. If the deceased leaves 10% or more of their net estate to charity, then the tax rate is 36% above the nil-rate band (and after deductions for UK IHT exemptions and reliefs). The government introduced this to encourage charitable giving and to support the voluntary sector.
Myth four: UK Inheritance Tax is only paid on death
Actually, UK IHT must be paid on some gifts while the donor is still alive. There are three types of gift for tax purposes. First, there are those that are exempt, where an immediate charge to UK IHT will never be due. Next, there are those that are ‘potentially exempt’, where a tax may arise if the donor dies within seven years – and where the cumulative value, of such gifts together with the value of the donor’s estate on death, exceeds the donor’s nil-rate band.
Finally, there are gifts that are ‘chargeable’ or taxable.The most common form of chargeable gift arises when a discretionary trust is set up. The tax rate applicable to such gifts is 50% of the death rate and is immediately payable, though tax only becomes due once the total value of chargeable gifts made by the donor within the last seven years exceeds their nil-rate band. Gifts to bare trusts and disabled trusts are exempt.
Myth five: “In this world nothing can be said to be certain, except death and taxes”
Benjamin Franklin’s renowned quote was making the point
that the new United States Constitution, however solid it looked, was not guaranteed to hold; not as certain as it is that one’s wealth will be taxed. However, in the case of UK IHT, it is generally only extreme wealth or, more likely, poor planning that makes payment inevitable.
From charitable and party political donations to gifts made to spouses and civil partners, there are many ways to save your heirs an IHT bill. In the UK, there is an annual gifting exemption of £3,000 that can be carried forward if it wasn’t used in the previous tax year, providing the potential for a married couple to remove £12,000 from their joint estate immediately. In addition to gifts out of so-called ‘excess income’, there are more esoteric exemptions, such as gifts for maintenance of a dependent relative.
The availability of these exemptions and the suitability of their use will, of course, vary based on individual circumstances.
The level and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. Members of the St. James’s Place Partnership in Hong Kong represent St. James’s Place (Hong Kong) Limited, which is part of the St. James’s Place Wealth Management Group and is a member of The Hong Kong Confederation of Insurance Brokers CIB, a licensed corporation with the Securities and Futures Commission, and registered as an MPF Intermediary. St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 4113955.
To receive a copy of The Investor magazine produced by St. James’s Place Wealth Management, please contact us at firstname.lastname@example.org.