New Changes to UK Inheritance Tax
HOW DO THE CHANGES TO UK INHERITANCE TAX AFFECT YOU?
In July 2015 George Osborne announced changes to UK inheritance tax laws. Under the new scheme, parents or grandparents will be able to pass on a home worth up to £1,000,000 for married couples or £500,000 for singles.
Under the current system, the inheritance tax threshold is £325,000. Estates valued at less than this amount are exempt from inheritance tax. Above this threshold, inheritance tax is payable at the rate of 40%.
When you die, any assets left to your spouse or registered civil partner (provided they’re UK-domiciled) are exempt from inheritance tax. In addition, any amount which you didn’t leave to others will be included in the inheritance tax allowance of your surviving spouse. This may sound complicated, so here is an example:
You and your spouse have assets worth £800,000 between you
When you die you leave £200,000 to your children and the rest to your spouse
You will not pay any inheritance tax on this because the £200,000 left to your children is within your £325,000 allowance and the remaining amount left to your spouse is exempt from inheritance tax.
When your spouse dies, the part of the £325,000 allowance which you did not use (i.e. the £325,000 allowance less the £200,000 left to the children = £125,000) will be added to your spouse’s allowance so that your spouse will be able to use her own allowance of £325,000 plus the unused £125,000 of your allowance and will be able to leave assets of £450,000 tax free.
From 2017 a new tax free ‘main residence’ band will be introduced. However, this will only be applicable where the home was the deceased’s main residence and where it passes to a direct descendant of the deceased (i.e. to a child or grandchild of the deceased). The new band is being phased in gradually starting at £100,000 from April 2017 rising by £25,000 each year until it reaches £175,000 in 2020. So in 2017, the maximum that can be passed on tax free will be the current £325,000 plus the additional £100,000 = £425,000 for singles or £850,000 for married couples. By 2020, this will be £325,000 plus the additional £175,000 = £500,000 for singles or £1,000,000 for married couples. On properties worth over £2,000,000, couples will lose £1 of the new allowance for each £2 of value over £2,000,000. So on a property worth £2,350,000 or more, there will be no additional allowance.
Whilst this is all good news for property owners, many expats living in the TRNC do not realise that any assets which they have in the TRNC would still be included in their UK estate and would be subject to inheritance tax in the UK. There are currently no double taxation agreements between the UK and the TRNC and so the fact that you have paid inheritance on your TRNC estate in the TRNC would not exempt you from paying inheritance on your TRNC assets in the UK as well.
Many ex-pats believe that because they don’t live in the UK, they are exempt from UK inheritance tax. The issue is not place of residence, but place of ‘domicile’. Usually you would have to have lived outside of the UK for at least 3 years prior to death to be considered domiciled out of the UK. Even then, previous cases have highlighted how the question of domicile can be very subjective and retaining any ties with the UK such as bank accounts could be sufficient for you to be deemed UK domiciled. Others believe that they can simply ‘hide’ their TRNC assets from the UK authorities. However, the fact is that it will not be you but your executors who will have to do the hiding and they are not likely to be willing to risk prosecution and jail sentences to avoid inheritance tax. The inheritance tax forms carry a stark warning of the implications of making a false declaration.
For this reason, it is vital to take proper financial advice in order to do everything you can to ensure that you can minimise your inheritance tax liability through legal means. There are a number of ways to do this:
Giving away gifts during your lifetime is one way of reducing the value of your estate. However, the concern is that if you give too much away, you may not have sufficient funds for the remainder of your life. Gifts given during your lifetime can still form part of your estate if you die within 7 years of giving the gift (reductions apply 3 years after giving the gift). However, you can give up to £3000 away each tax year tax free (unused allowances can be carried forward for 1 tax year only). In addition, gifts to charities and political parties are tax free and leaving 10% of your estate to a UK registered charity also qualifies you for a reduction on your inheritance tax rate to 36% instead of 40%. You are also entitled to give £250 each tax year to everyone you know. Gifts from income (provided that you still have sufficient means for your lifestyle to be unaffected) are also exempt. Gifts given to friends/relatives on marriage are also free from inheritance tax. In all cases, however, the gifts must be genuine unconditional gifts – parents who ‘gift’ their houses to their children but continue to live in them will still have their houses included in their estate.
It is also possible to use trusts to legally reduce your inheritance tax liability. A financial adviser would be able to give advice on discounted gift trusts and gift and loan trusts. Owning agricultural land or woodland can give some inheritance tax reductions.
Even with the new inheritance tax allowance, for people with assets in both the UK and the TRNC, it will often be the case that the value of the UK estate will exceed the allowance. Therefore, it is vital to take proper legal and financial advice to reduce your inheritance tax liability as much as possible. Having a will drawn up is essential and seeking advice from a financial adviser is strongly recommended. If you would like further information on making a will or would like to receive details of our associate financial advisers, please contact us.
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This guide is intended for general information purposes only and does not constitute legal or professional advice. Naomi Mehmet & Partners does not accept and specifically excludes liability for any loss or harm which may occur to any person as a result of relying on or otherwise using this information.