Inheritance and domicile tax in the UK – what you need to know today

Recent data has revealed that HM Revenue & Customs (HMRC) collected £500m from Inheritance Tax (IHT) in April 2022 alone – £10m more than in April of the year last and the highest amount for the first month of a fiscal year for the last five years.

This figure is expected to continue to rise, especially with tax thresholds frozen until 2026 and rising property prices. The Office for Budget Responsibility (OBR) predicts that HMRC will earn around £37bn from the IHT over the next five years. More and more families will be caught in the net of inheritance tax and the amount they will pay will also increase.

So it’s definitely worth taking some time now to take stock of your inheritance tax situation and take steps to reduce this unwelcome tax burden on your family and heirs. Make sure your estate planning is set up to make the most of available exemptions and allowances, as well as tax planning opportunities to reduce or eliminate your debts. Do not rely on IHT planning established years ago; you need to review your estate plan regularly to keep it current and on track to achieve your wishes.

Key Facts About UK Inheritance Tax

  • UK IHT is charged when assets are transferred to someone else, usually on death, but also potentially on lifetime gifts.
  • It is calculated and billed to your worldwide domain. This includes any property you own, including your home; Bank accounts; investments; non-trust insurance policies; household contents; jewelry; vehicles, etc Current mortgages and loans are deducted from the total.
  • Being tax resident in Portugal does not exempt you from this tax. Your estate is liable as long as you remain a UK residence – and many British expats have lived in the UK all their lives. Domicile is a complex and sticky British common law concept. The basic rule is that a person is domiciled in the country in which he has his permanent residence – the country considered to be your “homeland”. For example, HMRC might consider you domiciled in the UK if you intend to be buried there.

  • You can take action and cut ties with the UK to adopt a home of choice in Portugal, although it can take up to four years to get rid of a UK domicile for inheritance tax purposes. You cannot ask HMRC for a decision on your domicile status, it will only be determined when you die, so you need specialist advice to determine your domicile.
  • Assets located in the UK are always subject to UK IHT, regardless of domicile.
  • The IHT tax rate is a flat rate of 40% (reduced to 36% if 10% of the estate is bequeathed to charity).
  • Transfers to spouses and civil partners are exempt from UK inheritance tax provided you are both domiciled in the UK. If any of you are domiciled outside the UK, their exemption is limited to the zero tranche.
  • The standard inheritance tax zero rate band (threshold/abatement) is €325,000. Any unused amount on the first death can be transferred to your spouse/partner, potentially giving your joint estate compensation of up to €650,000 on the second death.
  • There ‘zero rate residential band” (RNRB) can provide an additional allowance of £175,000 for a property which is or has been your main residence (but on one property only). This also applies to homes outside the UK. But there are limits. It is only available if you bequeath the property directly to children or grandchildren (so beware of trusts). In addition, the threshold is reduced for estates valued at over £2 million. At this point it starts to decrease until it is completely phased out – currently for domains valued over £2.4m (this is the whole domain, not just the property).
  • While the thresholds are meant to increase with inflation, the 2021 UK budget froze both thresholds until at least April 2026. have the same effect as cutting them.

Have a specialist cross-border wealth advisor review your estate and wealth planning to confirm that it is on track to meet your wishes for your family and heirs. They should analyze your inheritance tax liability and recommend solutions to minimize your exposure. At the same time, seek advice on Portuguese inheritance law and the local inheritance and probate process, to help you take action now to ensure your estate is divided according to your wishes and to make life easier of your beneficiaries.

Tax rates, coverage and reliefs may change. All statements regarding taxation are based on our understanding of current tax laws and practices which are subject to change. Tax information has been summarized; individuals should seek personalized advice.

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By Adrien Hook
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Adrian Hook is a partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma of Financial Advisor (DipFA) and is a Fellow of the London Institute of Banking and Finance (LBF) .

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