A primer to avoiding inheritance tax
Death and taxes—the two certainties in life come together in one of our least favourite taxes, inheritance tax. It seems unfair, doesn’t it, that having paid tax on income, the government then wants a second bite of the cherry when you try to pass on your assets to your loved ones. But with good planning you can mitigate your liability—there are ways of legally avoiding inheritance tax and you owe it to your family to make sure you take all the measures available. This quick guide will outline some of the things you can do, but as individual circumstances vary, make sure you take professional advice to make the most of your wealth.
Your guide to avoiding inheritance tax
None of us like to think about our demise, but planning for how our dependents and beneficiaries will fare without us is essential. In the UK, inheritance tax becomes liable on individual estates worth more than £325,000 or for married couples worth more than £650,000, at a rate of 40 percent. And even if you’re an expat living abroad, if you haven’t taken measures to change your domicile, your estate will still be liable. However, there are measures you can take that will aid you in avoiding inheritance tax:
- Take advice on what you need to do to change your domicile from the UK to a more favourable jurisdiction. Your domicile is governed by where you were born, where your father was born and where you hold your assets. Obviously, the first two can’t be changed, but by disposing of UK assets and moving your money offshore, you can start the process of changing your domicile. The critical thing is being able to show that you have no intention of returning to the UK. This means relinquishing your UK passport, severing ties with home, selling UK property assets and closing your UK bank accounts. Naturally, this is only worth doing if your new country of residence has a more favourable inheritance tax regime.
- Additionally, you can protect your money from the taxman by taking advice on tax efficient investment vehicles. Establishing family trusts and gifting money at least seven years before you die are two of the most effective ways of avoiding inheritance tax. Furthermore, putting your pension pot into an offshore scheme such as a QROPS can also contribute to avoiding inheritance tax.
- If you are settled in the UK and can’t change your domiciliary status, investing in the Alternative Investment Market can be another way of avoiding inheritance tax. Shares listed on this exchange have been made exempt from inheritance tax by the UK government to encourage investment in smaller, less well-known companies. Additionally, investing in a business can result in business property relief—family-owned business premises are exempt from inheritance tax so beneficiaries are protected from having to liquidate the family business to pay tax.
- By transferring assets into a trust more than seven years before your death, you can bring the inheritance tax liability down from 40 percent to 20 percent.
When it comes to avoiding inheritance tax, the issues are complex and particularly so if you’re a British expat living, working or retired abroad. It certainly pays to take professional advice and Pryce Warner has more than 40 years of experience in this field.