Inheritance Tax Planning for UK Expatriates

Planning for the future begins now. Here’s everything you need to know about inheritance tax for UK expatriates.

By Brendan Harper, Technical Services Manager, Friends Provident International


It often comes as a great surprise to British expatriates when they are informed that, in spite of living overseas, their estates remain potentially subject to UK Inheritance Tax (IHT). This is because UK IHT applies to your worldwide estate if you are UK domiciled. Your domicile is determined at birth (usually you take it from your father) and remains with you unless you take significant steps to acquire a domicile elsewhere.
Unfortunately, if you intend to return to the UK at some point, or even if you don’t intend to return but do not intend to remain permanently in your current country of residence; you cannot change your domicile. This leaves your estate exposed to UK IHT which, after the deduction of a ‘nil rate band’ of £325,000, is levied at the rate of 40%. So what tactics can be employed to reduce or avoid the impact of IHT?

Transferable Nil Rate Band

If your spouse is also UK domiciled and you leave all your assets to him/her on death, the transfer is exempt from IHT. Furthermore, the unused part of the nil rate band is transferred to the spouse’s estate, so that up to £650,000 can be left free of IHT on the second death. So, if your joint estate is less than £650,000, you need plan no further than ensuring that you have made a will to ensure that your spouse receives the estate.
If your joint wealth exceeds this or you intend to leave assets to other beneficiaries, then further planning may need to be undertaken.

Insure the liability

If the estate is mostly covered by the transferable nil rate bands, the simplest form of planning may be to insure the liability. This involves paying premiums to a simple insurance policy written in trust, the proceeds of which will be used to pay the IHT. This strategy can be relatively cost effective and means that you remain in control of your wealth.

Lifetime Gifting

If you can afford to give money away during your lifetime, this can reduce the impact of IHT. A one-off capital gift to an individual is known as a ‘potentially exempt transfer.’ If you survive the gift by seven years, it will fall outside your estate for IHT purposes.
There are several IHT exemptions that you can also take advantage of, including a £3,000 annual exemption, gifts in contemplation of marriage and gifts for a child’s maintenance or education.
Perhaps the most effective exemption is ‘Normal Expenditure Out of Income,’ which immediately exempts gifts provided they comply with the following conditions:
  • They form part of your normal expenditure
  • They are made from income
  • You are left with enough income to maintain your normal standard of living
If these conditions are met, unlimited gifts can be made that are immediately outside the estate for IHT.

Advanced Planning

Usually, for a gift to be effective, it must be given outright to an individual. This results in two potential problems: what if you want to control when the beneficiary receives the money, and what if you also require some form of access to it?
Both of these concerns can be dealt with by utilising specialist trust arrangements. There are various arrangements that can be used, depending on your specific circumstances, so seeking advice is essential.
For example, if you want to save for retirement and are also worried about IHT on your savings should you die before the retirement date, a specialist trust, known as the ‘Future Benefit Trust,’could be used that allows you to gift a series of savings plans into a discretionary trust, from which the settlor cannot immediately benefit. Regular payments to the trust are treated as gifts and the fund is outside the estate for IHT in the event of death.
An additional feature is that, on certain dates in the future—chosen at the outset by the settlor—the settlor becomes entitled to the savings plans. This allows him to draw down an income from retirement in the knowledge that, should death occur in the meantime, a lump sum can be left to heirs free of IHT. The benefits of this arrangement include:
  • Ability to remove wealth from the estate for IHT purposes
  • Ability to access wealth at a future date, thus providing retirement income
  • Ability to leave wealth free of IHT to heirs
  • Ability to control who benefits and when.