HM Revenue and Customs (HMRC) recently announced that it raked in £6bn for inheritance tax receipts in 2021.
This is a 19% or £1bn ($1.35bn, €1.19bn) rise in total receipts from the year before – and also a record intake for the UK tax collector.
Jason Porter, director at Blevins Franks Financial Management and head of its European emigration advisory service, has said that the record IHT receipts will impact UK expats.
“UK inheritance tax is payable on the worldwide estate of a UK-domiciled person who has passed away, as well as on gifts made by UK-domiciled people within the seven years prior to death,” he said. “UK assets are always liable to inheritance tax, regardless of the domicile of the owner.
“This year, IHT will affect around 33% more families, breaking all previous records.
“UK IHT is determined by domicile, not residence. Someone can live overseas for many years and still be a UK domicile, making worldwide estate liable, except in France, where the situation is different.
“If assets are held in the UK, these will be taxable regardless of the domicile status. Whether living in the UK or abroad, if one spouse is a UK domicile and the other is not, it is worth noting that the usual spousal exemption is limited to where the non-UK domiciled person inherits from the one who is UK domiciled.”
Why the rise?
The increase of almost £1bn of IHT collected by HMRC over a 12-month period is due to a few factors, the most unfortunate of which is directly connected to the recent pandemic.
Covid has had a terrible impact on many families and has led to an increase in the number of annual deaths meant that more estates than usual were assessed for inheritance tax.
This period has also seen record highs on property. The surge has increased the value of estates already subject to IHT, but also pushed others across the tax threshold.
Chancellor Rishi Sunak’s decision to freeze allowances on tax payable till 2026, despite rising inflation, will likely see more families being caught in the IHT net, as least for the next five years.
Allowances and exemptions for expats
Porter added: “Inheritance tax is charged at a flat rate of 40%. The main allowance, or ‘nil rate band’, before tax is payable on IHT is £325,000 per person.
“However, it is possible for spouses and civil partners to pass any of this unused allowance onto each other completely tax free. Since spouses/partners are exempt, if the estate planning is structured so that assets are passed to the surviving spouse on the first death, then onto children or other heirs on the second death, a couple could have a potential combined allowance of £650,000.
There is also a second allowance, often referred to as a residential nil-rate band (RNRB), which currently allows an additional £175,000 per person. Again, this could be combined with a spouse or civil partner to £350,000 – but is only applicable when bequeathing a main home directly to children or grandchildren. A couple, therefore, could have a combined total allowance of up to £1m.”