Inheritance Tax Planning

Inheritance Tax Planning

What is Inheritance Tax?

Inheritance Tax is a tax applied to the estate of someone who passes away.

The standard Inheritance Tax rate is currently 40% and it is charged on the part of your estate that is above the threshold set by the government.

There is currently no Inheritance Tax to pay on your estate should you leave everything to your spouse or civil partner, a charity or a community sports club.

Relevance of Domicile to Inheritance Tax

Domicile is a concept of general law and not tax law. An individual is normally domiciled in the country where they have their permanent home, being the place with which they have the closest family, social and economic (business) ties and to where at some point in the future they intend to return, e.g. on retirement.

There are three types of domicile: a domicile of origin, a domicile of dependence and a domicile of choice.

1. Domicile of origin: this is normally your father’s domicile at the time of your birth. A domicile of origin can never be extinguished, but it can be displaced by acquiring a domicile of choice or dependence.
2. Domicile of choice: there are two elements to acquiring a domicile of choice: (i) you must leave your country of domicile and settle in another country; and (ii) you must provide evidence that you intend to live there permanently or indefinitely.
3. Domicile of dependence: a dependent person has the domicile of the person on whom they are considered to be dependent by law. Dependent persons are unmarried children under the age of 16 and mentally disordered persons.

References to someone who is UK domiciled, means that they are domiciled in either England and Wales, Scotland or Northern Ireland.
Even if you are not domiciled in the UK under general law, the Revenue will treat you as ‘deemed domiciled’ in the UK for Inheritance Tax if at the date of death:

1. an individual has been resident in the UK for 15 out of the past 20 years, or
2. an individual was born in the UK with a UK domicile of origin and return to the UK having obtained a domicile of choice elsewhere.

If you are domiciled or deemed domiciled in the UK, then Inheritance Tax applies to your worldwide assets.

If you are not domiciled or deemed domiciled in the UK, then Inheritance Tax applies only to your UK assets.

Where assets pass from a UK domiciled spouse or civil partner to a non-UK domiciled spouse or civil partner, then the spouse exemption is limited to the Nil Rate Band.

What can be done to mitigate Inheritance Tax?

There are a number of ways in which Inheritance Tax can be mitigated with careful planning. However, the government regularly changes the rules so it is important to review any planning put in place periodically to ensure the planning has the desired effect.

The common Inheritance Tax planning reliefs are as follows:

1. Business Property Relief which may reduce the value of a business or its assets for the purposes of Inheritance Tax.
2. Agricultural Relief may also be applied to reduce the value of your estate if your estate includes a farm or woodland.
3. Inheritance Tax reduced rate of 36% may be applied to your estate if you leave at least 10% of your net estate to charity.
4. Relief from Inheritance Tax on gifts which you make from your estate providing you survive 7 years of the gift.

Our Private Client team are able to advise you on a wide range of Inheritance Tax planning options, including those listed above and many others. We will conduct a thorough review of your current exposure before providing you with specific and tailored solutions to meet your needs and achieve the best results for you.