Understanding UK Inheritance Tax (IHT) for Non-Doms
Inheritance Tax (IHT) in the UK can be a complex and confusing subject, particularly for non-domiciled individuals (non-doms). Changes to the UK tax regime, particularly after 2017, have significantly tightened the rules. While non-doms still benefit from some exemptions, understanding how UK Inheritance Tax applies to them is critical, especially for individuals with significant wealth.
What is UK Domicile for IHT Purposes?
In UK law, domicile is distinct from residency or nationality. For IHT purposes, there are two main categories:
- Domiciled Individuals: A person domiciled in the UK is subject to IHT on their worldwide assets.
- Non-Domiciled Individuals (Non-Doms): Historically, non-doms were only liable for IHT on their UK-based assets (e.g., UK property, bank accounts). Their foreign assets remained outside the scope of UK IHT. However, recent changes in the law have tightened these rules, especially after the introduction of the deemed domicile rules.
What is Deemed Domicile for IHT?
The UK government introduced deemed domicile rules to prevent individuals from avoiding taxes by claiming non-domiciled status while living in the UK for extended periods. According to these rules, a non-dom becomes deemed domiciled for IHT purposes if they meet one of the following conditions:
- 15-Year Rule: If an individual has been a UK resident for at least 15 out of the last 20 tax years, they are deemed domiciled for IHT purposes. This means that they will be subject to IHT on their worldwide assets (including foreign properties, bank accounts, and investments).
- Domicile of Origin: If an individual was originally domiciled in the UK (i.e., their domicile of origin), but later moved abroad and acquired a domicile of choice elsewhere. They may still be deemed domiciled for IHT purposes. This applies if they return to the UK and become UK-resident.
These changes can have significant implications for non-doms who have previously enjoyed the benefit of not paying IHT on their global assets.
UK Inheritance Tax: Rates and Exemptions
The purpose of UK Inheritance Tax (IHT) is to regulate the transfer of wealth after an individual’s death. The tax is imposed on the estate of the deceased, including their property, investments, and personal possessions. However, there are exemptions that can reduce or even eliminate the amount of tax payable.
- IHT Rate: The standard Inheritance Tax rate is 40% on the value of an estate above the exempt threshold.
- Threshold for IHT: There is no IHT to pay if the value of your estate is below the £325,000 threshold. Additionally, if you leave everything above the threshold to your spouse, civil partner, charity, or community amateur sports club, no IHT will be payable.
- Increased Threshold: If you leave your home to your children (including adopted, foster, or stepchildren) or grandchildren, the IHT threshold increases to £500,000. Anything above this amount will be subject to tax.
UK Inheritance Tax and Non-UK Domiciled Individuals
For individuals who are non-domiciled in the UK, the key difference lies in which assets are subject to Inheritance Tax. Non-UK domiciled individuals are typically only liable for IHT on their UK-based assets, such as:
- UK property
- UK bank accounts
- UK investments
Once the 15-year rule or the domicile of origin rule deems an individual domiciled, they become subject to IHT on their worldwide assets, including properties, savings, and investments abroad.
How UK Inheritance Tax Affects Australian Expats
For Australian expats living in the UK, it’s important to understand that while Australia does not have Inheritance Tax, long-term residence in the UK can significantly affect the value of your estate and the legacy you plan to leave behind. If you’ve lived in the UK for an extended period, you may be caught by the deemed domicile rules, meaning your estate could be taxed on a much broader scale than you anticipated.
In Summary
Understanding Inheritance Tax (IHT) for non-doms is essential for expats, particularly for those who have lived in the UK for a significant amount of time. The deemed domicile rules can impact the scope of assets subject to IHT and the tax rates applied, potentially leading to substantial tax liabilities on worldwide assets.
If you’re an expat in the UK or considering a move back to Australia, it’s crucial to understand how UK inheritance tax applies to your situation. Contact us to help navigate these complex rules and plan for your estate accordingly.
To learn more, check out Atlas Wealth Groups’ podcast: Expat Chat