Friday, 8 August 2014

£3.4bn UK Inheritance Tax Bill for 2013/2014 - Don't get caught!

More and more people are falling into the trap of having a large inheritance tax bill to pay upon the passing of someone close to them. In 2013-2014, £3.4bn was paid to HMRC in inheritance tax. A significant rise over the last two years in particular. But why is this? Its partly down to the rising asset values (of property in particular) in the UK recently. More and more people are finding themselves with a liability and there has been a growing trend of British Expats getting caught in the trap more often since the change to the rules determining domicile. Particularly where they have assets in multiple countries around the world. There is a big difference between domicile and residency of a country, its important to understand the difference:

Domicile: the country that a person treats as their permanent home, or lives in or has a
substantial connection with.

Residency: the act of living in a place

This is an important distinction, an expat may well have lived outside their home country for 10
years but may still be classed as domiciled there, particularly if they maintain assets there like
a residence or bank accounts, etc. Failure to plan their taxation exposure can result in
some hefty bills dropping through the letterbox while they are alive and when they pass on.

So how can you and / or your family members avoid the tax trap that so many are falling into?

Firstly, it pays to get professional advice from a financial adviser as there can be many pitfalls, however, there are basically several options to reduce or remove an inheritance tax liability:

1) Make a will - this is the number one most important thing to do. If you are an expat get a specialist international will writer to do it for you. If you don't know one contact me and i can point you in the right direction.

2) Transfers between spouses (husband/wife) are often exempt. However, be aware, if you are British and your partner is of a different nationality you may not receive the spouse exemption.

3) Give away the liability - you can give away the excess money over and above the tax threshold, thus reducing your taxable estate. Some gifts may not qualify so get advice on how, to whom and where you can gift your money to.

4) Use trusts. There are many different trust options available, these can be a very cheap and effective way of reducing your inheritance tax liability while still being able to retain access to income or capital should it be required, however some tax may still be payable. Speak to an adviser on the most suitable option.

5) Insure against the tax liability. For example if you know you have a tax liability of £100,000 then take out life insurance to cover that liability. This will result in the estate being settled quicker and can be a cheap way of negating a future inheritance tax payment for your family.

As always, if you have any questions, let me know!

Have a great day, Andrew Lumley-Holmes.

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