UK Inheritance tax is most commonly imposed on the estate of a deceased person who is either UK domiciled, or owned assets in the UK, at point of death. There are exemptions available to mitigate inheritance tax, perhaps most notably the spousal exemption, allowing an unlimited transfer of value from a deceased spouse to the surviving UK domiciled spouse. A £325,000 nil rate band is also available to reduce tax on assets left to most other individuals. Tax is charged at a flat rate of 40% on value in excess of any exemptions.
I have lived outside of the UK for many years. Do I pay inheritance tax? What is UK domicile?
Under UK law, an individual acquires a domicile of origin at point of birth, usually following the domicile of their father at the time. From age 16, it is possible to establish a new domicile of choice by moving permanently to a new country, cutting ties to the UK and intending to remain in the new country for life, including having it as a final resting place. Merely living outside of the UK for many years is not sufficient with the liability remaining to inheritance tax on assets globally.
How much is inheritance tax UK 2022?
The current rate of UK inheritance tax on death is 40%. On chargeable lifetime transfers (usually lifetime gifts to most trusts), the rate is 20% initially with additional periodic charges every 10 years and exit charge on distributions from the trust.
To establish the inheritance tax liability at point of death, for a UK domiciled person, add together all liable assets globally, deduct any allowances and tax the balance at 40%. Remember, simply being non UK resident for many years does not exempt an individual from UK inheritance tax. Domicile drives the liability, with residency usually only having a minor impact. For a non UK domiciled person, add together the value of all UK situs assets, deduct any allowances and tax the balance at 40%.
UK inheritance tax is levied on the estate of a deceased person, with tax payable by the estate before distribution to beneficiaries. So, it is usual for any liability to have been settled before value is received by beneficiaries. Sometimes gifts made to beneficiaries within 7 years of death of the donor are also retrospectively taxable to inheritance tax.
This rule is largely to prevent deathbed planning, with the donor needing to survive 7 years after making a transfer of value to other individuals or trusts. Such gifts are commonly referred to as a potentially exempt transfer (PET) or, when made to a most trusts, a chargeable lifetime transfer (CLT). In many cases, after the donor has survived for 3 years, a process of taper relief applies, reducing the tax bill down to zero after 7 years.
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© 2010 – 2022 deVere Group. All rights reserved.