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UK Inheritance Tax Basics

This is a massive subject and full of twists and turns. Unlike other main taxes IHT does not apply to everyone in the same way. This article will deal with the basics of the tax and show ways in which it can apply in different scenarios.

1. Who is liable for the tax? UK domiciles wherever they are living. Very simple
2. What is a UK domicile? Anyone whose father who had the UK as his centre of life. You take a UK domicile of origin status from your father and it stays with the individual for life
3. Does it change things if you were born outside the UK? No -your place of birth is irrelevant
4. What does having a UK domicile mean? You will be liable to UK IHT on your Worldwide assets at death and certain transfers during life
5. What are Worldwide assets? Anything you own anywhere-so a house in Portugal would be included in the estate
6. Are UK domiciles living in Portugal liable to the tax? Yes absolutely yes
7. What is the tax? It is 40% on any excess over £325000.So an estate of say £625000 would have a liability of
£120000.
8. Are there any allowances? Yes. Each individual has an allowance of £325000. It is called the nil band. So no tax on assets with a value below £325000. Couples have an allowance each-so the total allowance then becomes £650000 before tax is due. This could rise to £1million but is dependent on having previously owned UK residential property
9. Is there an issue with the allowances? Yes. The nil band has not been changed since 2009. Think back on what a property was worth £325000 (in Portugal or the UK) and think what it’s worth now. No tax due in 2009 but now…… So IHT is a stealth tax
10. What is the spouse exemption? This enables couples to transfer assets between themselves during life or on death without the transferred amount being liable to IHT. The amount is unlimited.
11. Can you use the nil band and the spouse exemption? Each partner can do exactly that. So on the first death there will be no tax to pay -whatever the amount transferred. However the combined total will be subject to tax on the second death
12. How much tax was paid in 2020/2021? HMRC collected just over £5billion.
13. Is the tax voluntary? Yes-not a single penny needs to be paid by anybody. Benefit your heirs and not the UK HMRC! Careful long-term planning can substantially reduce the amount of tax due
14. Does the tax apply to individuals who are not UK domiciles? Yes-but only if they have assets in the UK worth more than £325000. So an Irish man living in Portugal with UK assets will be liable to IHT if the value is over £325000
15. Can I lose my UK domicile status? Yes. You would then acquire a domicile of choice in your new Country of residence-say Portugal.
16. How do I do that? By the individual: a Severing all ties with the UK (Have no property there/no assets/no business/no clubs/no frequent visits) AND b Showing the intention be permanently resident in the new Country of residence (say Portugal)
17. What is the advantage of having a Portuguese domicile of choice? No IHT in Portugal no UK IHT either
18. How long will it take to acquire a domicile of choice in Portugal? No way of telling -but it will take years. Richard Burton lived in Switzerland for 27 years but was still liable as it was held he had never acquired a Swiss domicile of choice. After 27 years!!
19. Is it prudent to rely on being a non-UK domicile in order to avoid IHT? Absolutely not
20. Why? Because the domicile of choice status must be in existence at the date of the lifetime transfer or death. A domicile of choice that can take years to acquire (see Richard Burton) will be lost very quickly if

A The individual(s) return to the UK or
B Go to live in another Country or
C Re-establish links with the UK

In all three examples the domicile of choice will be lost and UK domicile will revert and it’s back into the IHT net! Just needs careful long-term planning to avoid or reduce IHT.

For further information and enquiries please find the relevant contact details below…
Email: alex.ives@chasebuchanan.com
Phone: +44 (0)7512 512068 or +351 308 802 691
Website: https://chasebuchanan.com/

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