Facing up to UK inheritance taxes as an expat living overseas

The majority of British expats living and working overseas aren’t even aware they may well be hit with a large inheritance tax bill if they’ve been mentioned in a family will.

The misunderstanding that inheritance tax doesn’t apply to Brit expats overseas is likely to be the fact that they’re not taxed on their overseas incomes. Unfortunately, it doesn’t quite work like that, as the long arm of the British taxman has the right to grab the tax wherever you live as your estate is treated by HMRC in a totally different manner than your income. Unless you’ve actually managed to have HMRC accept you’re no longer domiciled in the UK and have that status in your present country of residence, you’re still on the inheritance tax hook.

Apparently, ‘country of domicile’ is a somewhat complicated term as regards tax, possibly deliberately so, as it doesn’t just rely on your present overseas home and job. Demands for inheritance tax are likely to escalate over the next few years, as it’s a growing source of revenue for the UK government, pulling in some £5 billion last year and projected to take even more in 2019. In addition, the scare story of a Labour government plan to tax inherited wealth more harshly if and when they get power again is probably true.

Your nil-rate band at present is £325,000, a sizeable inheritance tax-free sum possibly easily exceeded if an equally sizeable slice of London property is part of your inheritance. Any value over this amount attracts a 40 per cent tax, thus giving an excellent reason for retirement planning. There are two options – sorting it out from square one or getting professional help for this very complicated job. Rules change regularly, with the present possibility of married couples or civil partners being able to pass on at least a million to direct descendents without any tax liability by 2020. However, especially concerning the UK taxman, possibilities occasionally don’t happen.

Writing a will is essential, as it proves your intention as regards inheritance and mentions exact amounts and their locations. The easiest way to avoid IHT is to gift personal possessions and money whilst you’re still alive, but this is limited to an amount of £3,000 every year. Using a pension or trust legally ‘wraps’ your cash and possessions but are expensive options unless you’re relatively wealthy. However, passing on a private pension or SIPPS can be done tax-free.