So says Jeremy Pearson, technical manager for Canada Life, who said that the fact that the IHT threshold has been frozen at £325,000 until 5 April 2018 will affect certain categories of British expats as much as it affects their counterparts resident in Britain.
Pearson’s comments came in the wake of news earlier this week that if the nil rate tax band for IHT had not been frozen at £325,000 in April 2009, but had been linked to inflation instead, it would now stand at £372,000. This was seen as having cost IHT payers £18,800 each at this point.
By April 2018, the threshold would have been £415,000 if index-linked. That, according to Pearson, equates to an extra £36,000 IHT because of the extended freeze – a significant amount, he noted, “when many people are aiming to use an inheritance to fund education and housing deposits” for children and grandchildren – including many parents and grandparents who don’t currently live in Britain.
“Those expats who plan to return” one day to the UK, for example, he noted, will be liable for IHT, even if they don’t currently have to pay UK income tax.
“Expats will still be liable for UK inheritance tax if they have kept any ties to the UK – property, children’s education, etc,” Pearson said.
“And it applies to all their worldwide assets.
“On the other hand, if they have married someone who is not from the UK, there were improvements to the IHT position from 6 April 2013, and they should review their position with a financial adviser as this will probably affect their estate planning.”
The three-year rule
Finally, someone who has severed all ties to Blighty, and has no intention ever to return, is “still in the IHT frame for three calendar years after they left,” Pearson noted.
“So should make sure they have temporary insurance cover in place to pay the tax bill, at least,” in case they die before the three years is up.
According to Pearson, as long as the nil rate band remains frozen, the effects of IHT will become more significant, as asset growth leads directly to more IHT, and this in turn can be "upsetting" to people, particularly if they later learn they could have reduced or avoided it.
“While the largest asset in most people’s estate is the family home, and [at a time when] house prices aren’t rising dramatically, any increase plus investment growth and deposit interest just boosts the IHT bill,” Pearson said.