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UK Inheritance Tax for Non Residents: Rules and Exemptions

Published by UK Property Accountants
Published Date: September 14, 2023 , Updated Date: October 17, 2023

Inheritance tax applies not only to the UK residents but also to non-UK residents. But the scope of tax is limited in case of non-residents. For non-residents, inheritance tax is normally chargeable only on the UK assets/properties (e.g., UK land and buildings).

So, if you intend to invest in the UK, you need to plan carefully.  

Investing in UK assets which are IHT free

Most of the assets the non-residents hold in the UK are chargeable to IHT. But the below assets are IHT free:

Gilts

Gilts are the UK government securities. Amount the non-UK residents own as gilts are free from IHT. It is not necessary to be non-UK domicile. Whether you are UK domicile or non-UK domiciled, gilt is free from IHT for non-residents.

Foreign currency bank accounts

Amount the non-residents hold in the UK bank in foreign currency bank accounts are free from IHT. To get this exemption, they need to be non-resident at the time of their death.

Transferring assets to companies to save IHT

Transferring assets to companies to save IHT

The investors in the UK property can minimise IHT by using Family Investment Companies. This ensures IHT is calculated based on current value of the property (instead of the value at the time of your death).

Note: But this might not always be appropriate option as you might have to pay additional SDLT (non-resident surcharge) and follow ATED compliance.

Limiting your investment in the UK property to save IHT

IHT is payable only when the value of death estate of an individual exceeds £325,000. So, amount up to £325,000 is free of Inheritance Tax. This amount is called Nil Rate Band.

So, non-residents can escape inheritance tax on UK property by restricting investment to £325,000.

In addition to £325,000 that is IHT free, if your spouse is UK domiciled at the time of the death, s/he can transfer some of Nil Rate Band to you. The amount that can be transferred is £55,000 (so the total Nil Rate Band would be £380,000 in such case)- IHT 1984 section 18.

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IHT on Non-UK residents who were previously UK resident

Normally, IHT is charged to non-UK residents only on the properties located in the UK. However, there are some cases where Non-residents are chargeable to IHT even in the abroad assets. This applies when you are non-UK resident but UK domiciled.

A person is a UK domiciled when s/he is likely to settle permanently in the UK. So, even if s/he is not currently living in the UK (non-resident), s/he can be considered a UK domicile if s/he:

  • had been resident in the UK for at least 15 out of the last 20 tax years and
  • had been resident in the UK for at least one of the four tax years ending with the relevant tax year

So, being non-UK resident is not sufficient. You need to be non-UK domicile as well as non-UK resident to escape Inheritance Tax on foreign properties.

Changing UK domicile status to save IHT

A UK domiciled person can save IHT (on overseas properties) by losing the UK domiciled status.

So, UK domiciled individual having properties abroad is tempted to go away (and change their domicile status).

Changing UK domicile status to save IHT

But simply moving out of the UK does not guarantee IHT saving on foreign properties. You need to ensure:

  • You were not resident in the 15 out of the last 20 tax years
  • You were not UK domicile in the last three years
  • You have given up your interests in the UK (your family no longer lives in the UK, you do not have home in the UK, you do not have businesses in the UK etc.)

So, you must establish yourself as non-UK domiciled non-residents to save UK inheritance tax on abroad assets.

FAQ

Is there tax on bringing inheritance money into the UK?

No tax is charged when money inherited from abroad is brought to the UK (unless you inherited it from a UK domiciled person).

But tax (IHT) might apply later if you retain the money in the UK bank until you die. Your heir might need to pay IHT on the money inherited.

Is inheritance from abroad taxable in UK?

There is UK Inheritance Tax even if someone inherits properties in the overseas. This applies in case of UK domiciled.

So, if your parents are UK domiciled, and own overseas properties, you need to pay Inheritance Tax upon inheriting the abroad properties.

Do I need to pay tax on inheritance from abroad?

Whether you need to pay IHT depends on from whom you inherited the property (the person who died). You need to pay IHT if:

  • If the deceased person is a UK domiciled or
  • The property you inherited is UK land or building

So even if you inherited a property from the non-resident, IHT might apply if the non-resident was UK-domiciled or the property you inherited is a UK property.

Conclusion

Non-residents need to plan in advance to save IHT. As IHT rules are not easy to understand, expert guidance is helpful for your IHT planning. 

Ready to navigate UK Inheritance Tax as a non-resident?

Contact us today for efficient and hassle-free assistance.

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