UK: Death and Taxes on UK Assets

Domicile & IHT

IHT at death is chargeable at 40%, after allowances. Significant IHT savings can be achieved when enacting planning over 7 years before death. 

UK domiciled/deemed domiciled individuals are subject to IHT on worldwide assets (non-domiciled individuals are liable on UK assets).

Individuals may be domiciled in the UK under general law or may be deemed domiciled for IHT purposes if they were either:

• UK domiciled under general law in the last three years.

• A formerly domiciled resident i.e. a UK resident born in the UK with a UK domicile of origin (if resident in the UK within the two prior tax years).

• Resident in the UK for at least 15 of the prior 20 tax years (and were UK resident within the prior four tax years).

A trust will be domiciled outside the UK if set up when the settlor was not UK domiciled (unless they become a formerly domiciled resident). This can prevent IHT, however, this will likely change per the upcoming government budget. 

There is an IHT exemption for transfers between spouses, however this is limited to £325,000 for a transfer from a UK domiciled to a non-UK domiciled spouse. However, during lifetime (or within two years of death of the UK domiciled spouse) an election can be made to treat the non-UK domiciled spouse as domiciled. This could enable assets to be left to the non-domiciled survivor IHT-free, with the consequence that their foreign assets will be liable to UK IHT on death (election ceases if the electing spouse becomes non-UK resident for four tax years).

Loans taken out by non-domiciled individuals to acquire exempt foreign property will be deducted from it (rather than from IHT-liable UK assets).

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Excepted Estates

Estates without IHT liabilities meeting conditions have simplified reporting requirements (requirements depend on domicile). Estates of individuals that were never domiciled/deemed domiciled in the UK can be treated as excepted (allowing simplified IHT207 form use) if the gross value of UK assets does not exceed £150,000, their UK assets consisted of only cash/quoted securities, they did not indirectly have interests in UK residential property, and did not gift UK assets exceeding £3,000 in the 7 years preceding death.

If there is a foreign will, then when applying for grant of probate in England/Wales, details of whether the foreign equivalent of a grant of representation has been obtained are needed along with copies of foreign wills/wills with foreign assets (with English translations if needed). 

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Other Taxes

Tax liabilities, sale proceeds, and gross estate value determine whether Tax Returns and registration with HMRC’s trust registration service are required.

The estate may incur Capital Gains Tax (CGT) liabilities on asset sales. CGT can be saved by transferring assets to beneficiaries for them to sell and timing sales to use Annual Exemptions available for initial years. Relief may be claimable when assets are sold for less than their death valuation.

UK residential property sales are reportable within 60 days if CGT is due or the deceased was non-resident.

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Reference/ Citation

https://www.gov.uk/guidance/inheritance-tax-deemed-domicile-rules 

‍https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm06021