UK inheritance tax is charged on lifetime transfers of assets and on the estates of deceased persons. The rate of tax is 20% for lifetime transfers and 40% for assets on death, subject to a £325,000 nil rate band and some exemptions. Lifetime gifts made more than seven years before death are not subject to inheritance tax.
UK inheritance tax applies to assets of individuals domiciled in the UK, wherever the assets are situated, and to the UK assets of persons who are not domiciled in the UK. The domicile of a person is the legal jurisdiction with which that person is connected the most closely, so it effectively means the country that is the real home of that person. A person’s domicile of origin would normally be the country that was considered to be home by that person’s father at the time of their birth. UK inheritance tax applies to a person whose domicile is the UK at the time when they make a particular transfer.
Although persons who are non-UK domiciled are liable to inheritance tax only on their assets in the UK, certain types of property are excluded from the charge to inheritance tax. These assets are referred to as excluded property.
Property located overseas owned by non-domiciled persons is the most obvious form of excluded property. Without this exclusion, the UK inheritance tax would potentially apply to assets of anyone in the world, wherever those assets were situated. This exclusion therefore ensures that non-domiciled persons are only liable to inheritance tax on their assets located in the UK.
Settled (trust) property outside the UK is also excluded property if the settlor of the trust property was non-UK domiciled when the settlement was created. This means that persons who are not domiciled in the UK may be able to manage their tax affairs by setting up offshore trusts, provided that the settlement is carefully planned. Generally a reversionary interest in settled property is also excluded property.
Holdings of units in authorised unit trusts and open ended investment companies are excluded property for inheritance tax purposes if they are held by a non-UK domiciled individual, or if they are held in a trust where the settlor is non-UK domiciled when the trust is created.
Foreign currency (non-sterling) accounts held with a bank or post office are excluded property if held by an individual who is not domiciled, resident or ordinarily resident in the UK. This also applies to non-sterling accounts held by trustees who are not domiciled, resident or ordinarily resident in the UK, where these accounts are held on behalf of a life tenant of a trust with an interest in possession in the bank account. This is excluded property only if the settlor of the trust property was not resident in the UK at the time the settlement was created.
UK government securities held by persons who are not ordinarily resident in the UK are referred to as FOTRA (free of tax to residents abroad) securities. These are excluded property for inheritance tax purposes. In the case of certain UK government War Loan stock, there is an additional requirement that the person must be domiciled outside the UK for the exclusion to apply.
Other excluded property includes:
Wages and tangible movable property of members of visiting armed forces in the UK; Pensions paid to former employees of the former colonial governments; Certain other pension payments and gratuities that are treated as being paid abroad; National Savings Certificates held by an individual domiciled in the Channel Islands or Isle of Man; A decoration awarded for valour or gallant conduct, provided that it has never been transferred for money or money’s worth; and Certain ex gratia compensation payments paid by the UK government to certain survivors of imprisonment during world war two.
Excluded property is not subject to inheritance tax on lifetime transfers or on death. Certain excluded property is however taken into account in measuring the value of a person’s estate before and after a transfer, when property that is not excluded property is transferred. For example, a person holding shares directly in a company may also hold some shares under a trust set up by a non-domiciled settlor and this additional shareholding, although it is excluded property, could augment the value of the shares held directly. This could be the case if the combined holding amounts to a controlling shareholding in the company and is therefore valued at a higher amount per share than the direct holding would be taken on its own.
Although the above categories of excluded property are quite specific and limited, they should be examined carefully by persons not domiciled in the UK to see if there may be some advantage to acquiring certain types of asset so as to ensure that no unnecessary UK inheritance tax liabilities arise.
Sources:
HMRC website www.hmrc.gov.uk
“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009