With the UK government taking record inheritance tax (IHT) receipts and penalties, can clients escape IHT by moving overseas? Can they still pass on their estate as they wish? By Jason Porter, director of specialist expat financial planning firm Blevins Franks.
IHT receipts in April to July this year were up £200m ($248m, €232m) from last year at £2.6bn. Fines on families who broke IHT rules jumped by a third to £2.28m last year.
If there is a liability to IHT, this sits with the estate itself and will need to be paid before the net can be paid away to beneficiaries. While the estate passing to the spouse is exempt, the rest would be potentially liable at 40%, less a tax-free amount of £325,000. If any of the £325,000 is unutilised on the first death, there will be up to £650,000 of allowances available on the second.
A further £175,000 of relief is available on the main home if it is passed to children, or £350,000 if this is not utilised on the first death. While overall, there is up to £1m of allowances, the main home relief tapers away for estates worth over £2m, reducing to nil at £2.35m.
The application of UK succession law is based upon the domicile status of the deceased, not where they were tax resident at the time of death.
Domicile is a common law concept, and a person is domiciled in the UK if they belong here and regard it as their home. At the outset, this follows the parents’ (commonly the father’s) domicile at birth (the ‘domicile of origin’). This can be changed by moving somewhere else, making it their permanent home, renouncing the UK as their native land, and adopting a ‘domicile of choice’.
This sounds much easier than it really is in real life. In fact, a UK domicile of origin is very sticky, and can remain in place even if you have been absent from the UK for many decades.
The majority of EU countries have a civil law legal system, where succession law and inheritance taxes are applied on the basis of the deceased’s habitual residence status.
The incompatibility between the two rules could see the estate of a UK national who dies while living in an EU member state an area of cross-border legal conflict, with both the UK and the EU state claiming the asset must pass to their heirs according to their succession law, as well as arguing they have the taxing rights.
The aim of a double tax convention is to allow the country in which the deceased was domiciled to tax all property wherever it is, and for the other country to tax only specified types of property, mainly real estate, in its territory. If double taxation arises, there are rules for deciding which country gives credit for the other’s tax.
For the majority of European countries there is no template to fall back on to establish which country is the deceased’s domicile. As no national succession law automatically takes priority, there is no basis as to who has the taxing rights. If both choose to tax the asset, double tax relief should still be available, but this may be restricted if the asset is located in a third country.
The succession law of each member state varies somewhat, but the majority follow the Napoleonic code to some degree and include provision for ‘protected heirs’. In many cases, children sit in a superior position to the spouse, enabling them to inherit 50% to 75% of the deceased parent’s estate. They may also have the power to remove the surviving spouse from what was the marital home after a fixed period.
In 2015, the EU attempted to try and find a solution with its new European Succession Regulations. Also known as ‘Brussels IV’, the new law covers cross-border inheritances and allows foreign nationals living in the EU to choose whether the succession law of that EU member state or their national succession law should apply on their death.
Brussels IV is not the perfect solution. In some cases it can result in more succession tax becoming due. There also remains several options clients can choose from to protect their spouse, including inserting clauses in the conveyancing of real estate, amending the marital property regime around the ownership of other investments and assets, and looking at certain financial products which may provide flexibility in estate planning, additional allowances or reduced rates of estate tax.
This article was written for International Adviser by Jason Porter, director of specialist expat financial planning firm Blevins Franks.