Navigating UK Inheritance Tax: Insights from Westcott Dyson

Inheritance Tax (IHT) in the UK is a complex matter, and at Westcott Dyson, we understand that it's not just about where you live, but also where you're domiciled. For those looking to make a new country their permanent residence, we offer expert guidance in establishing a domicile of choice, effectively severing financial ties with the UK.

The Intricacies of Establishing a New Domicile

Simply moving to a new country doesn't automatically change your domicile status. It involves two key aspects: a definitive departure from the UK with no plans to return, and a clear choice to make another country your permanent home. Proving these elements can be tricky; extended living abroad alone doesn’t suffice. Without clear evidence, your worldwide assets may still be liable for UK IHT under the 'deemed-domiciled' rules.

Inheritance Tax Concepts You Need to Know

Inheritance Tax (IHT):

This is a tax levied on the estate of someone who has passed away. The estate includes all property, possessions, and money. The current rate is 40% on the value of the estate above the tax-free threshold of £325,000. This means that if an estate is valued over this threshold, the portion exceeding £325,000 is subject to this tax.

Domiciled in the UK:

A person is considered domiciled in the UK if they treat the UK as their permanent home and have a significant connection with it. This status is crucial for IHT purposes because it determines whether worldwide assets are taxable in the UK. Even if you live abroad, if you’re considered domiciled in the UK, your global assets can be subject to UK IHT.

Non-domiciled UK Status:

This refers to individuals who have their permanent home ('domicile') outside of the UK. If you’re non-domiciled, you're only liable for UK IHT on your assets that are located in the UK. This can significantly affect your tax liabilities, especially if you have substantial assets outside the UK.

Assets in IHT Context:

For IHT purposes, assets include anything of value that you own. This includes real estate properties, vehicles, investments like stocks and bonds, savings in bank accounts, and personal belongings like jewellery and art.

Nil Rate Band (NRB):

The NRB is the portion of an estate that is exempt from IHT. Currently, it's set at £325,000. Estates valued below this threshold are not subject to IHT, while those above it are taxed on the excess amount.

Residence Nil Rate Band (RNRB):

This is an additional threshold available when a home is passed to direct descendants, such as children or grandchildren. It's designed to reduce the IHT burden for families when passing on a family home.

Annual Gift Allowance:

You can give away up to £3,000 each tax year without it affecting your IHT liability. These gifts won't be counted as part of your estate for IHT purposes.

Gift with Reservation of Benefit:

This occurs when you give away an asset but continue to benefit from it (like living in a house you’ve given to someone else). These gifts might still be considered part of your estate for IHT purposes.

Potentially Exempt Transfer (PET):

This is a gift that is potentially exempt from IHT, provided that the giver survives for seven years after making the gift. If the giver passes away within this period, the gift may become taxable.

Chargeable Lifetime Transfer (CLT):

This refers to gifts that might be subject to IHT at the time of the gift. This is often the case with gifts into certain types of trusts or when the total value of gifts exceeds the annual allowance.

Inheritance Tax Taper Relief:

This relief applies to gifts made more than three years before the donor's death. It reduces the amount of IHT due on these gifts on a sliding scale, depending on how long before death the gift was made.

Intestate:

This term is used when someone dies without a valid will. In this situation, the distribution of their estate is governed by specific legal rules, known as the rules of intestacy.

Simple Will:

A Simple Will is a legal document that outlines how a person’s assets should be distributed after their death. It names beneficiaries and an executor who will manage the estate.

Testamentary Will:

This is a legal document that specifies how an individual's assets should be handled and distributed after their death. It can include specific instructions for care of minor children, funeral arrangements, and other personal wishes.

Deed of Family Arrangement:

This legal document allows beneficiaries to change the distribution of an estate after the death of the estate owner. It can be used for tax planning or to better reflect the deceased's wishes.

Trusts in Estate Planning:

Trusts are legal arrangements where trustees hold and manage assets for the benefit of others. They can help protect assets, manage wealth for future generations, and potentially reduce IHT liabilities.

Lifetime Direct Beneficiaries:

These are individuals or entities you choose to receive gifts from you during your lifetime. These gifts can reduce the value of your estate and potentially lower the IHT due upon your death.

Gift into Discretionary Trust:

This involves transferring assets into a trust where trustees have the discretion over the distribution of the trust's income or capital. This can help in estate planning but may trigger IHT liabilities.

Interest in Possession Trust:

In this type of trust, the beneficiary (or 'life tenant') has the right to benefit from the income or use of the trust’s assets during their lifetime. After their death, the assets pass to other beneficiaries.

Gift into Loan Trust:

This is when you loan money to a trust. The growth on the trust's assets is outside of your estate for IHT purposes, though the loan amount remains part of your estate.

Business Relief Investments:

These are investments in certain types of businesses that can be exempt from IHT if held for at least two years. This can be a strategic tool in estate planning but comes with investment risks.



Understanding these terms and how they apply to your personal situation is key in effective IHT planning and estate management. For more tailored advice, consulting with a professional like Westcott Dyson can be invaluable.