If you’re an Australian living in the UK for an extended period, it’s very possible that at some stage you’ll receive an inheritance from a family member back in Australia.
Here are eight practical tips to help you manage your inheritance and avoid any costly mistakes.
1. Domicile is all important
When it comes to inheriting money, the domicile status of the person you’ve inherited from is all-important – more so than your residency.
If they were deemed to be UK-domiciled – even if they were living in Australia at the time of death – then Inheritance Tax (IHT) will be an issue.
If they were domiciled in Australia, then no IHT will be payable. However, as a non-resident beneficiary of an Australian estate, there are special Capital Gains Tax (CGT) rules which Could impact on you in the same way as IHT, and need to be very carefully considered in any estate planning.
Domicile and residency rules can be complicated, and we would always recommend you get financial advice on this issue.
2. Declaring your inheritance to HMRC
As a first step, you’ll need to notify HMRC that you’ve received inheritance money, even if no tax is due.
If any tax is due, you’ll be expected to pay the tax within six months of the death of your loved one – not from the date of receiving the inheritance.
3. Inheriting property
If you are a resident of the UK, and you’re inheriting property, the good news is that you will not have to pay any CGT, Income Tax, or Stamp Duty when you take ownership of the property.
However, there may well be an IHT liability if the deceased was UK-domiciled and their estate does not cover it.
Also bear in mind that if and when you come to sell the property, you could be liable for CGT on the sale value if it’s not your main residence at the time of sale.
If you decide to use the property as a rental asset to raise income, you’ll obviously be liable for Income Tax on any rent you receive.
Again, we’d strongly recommend you speak to a tax expert regarding these issues.
4. If you’re moving the money to the UK
If you’ve inherited a substantial sum of money that’s currently in Australia, it’s likely that at some stage you’ll want to move some, or all of it, to the UK.
In a recent article, we looked in some detail at the issue of currency transfer and highlighted some of the issues involved with moving large sums of money between different countries.
In particular, fluctuating exchange rates can affect the cost of buying currency over relatively short periods of time and therefore impact on the amount you’ll receive.
By using a currency broker, you can ensure you get the best possible rate on your money. You’ll also have access to a series of exchange mechanisms designed to help protect the value of your fund when selling one currency and buying another.
5. If you’re leaving the money in Australia
Your future plans and current financial position may mean that you’ll want to leave some of your inheritance in Australia.
As Australia doesn’t have Inheritance Tax, there will be no IHT to pay. As we’ve already stated, however, as you will be a non-resident beneficiary of an Australian estate, CGT may well be payable by the estate on the value of assets left to you. This will be calculated at the date of death of the deceased.
The rules around CGT payable on inherited assets, and possible strategies to minimise the amount of CGT payable can be complicated. We would always therefore recommend you get specialist advice from a tax expert in this regard.
6. Consider your own estate planning
If you’re inheriting a substantial sum of money, along with any other assets, you’ll need to consider how this sum will impact on your own estate planning process.
You may want to consider gifting some of your inheritance to your children or grandchildren. You can do this either within the allowance limits set out by HMRC or, if you want to gift larger sums, as potentially exempt transfers (PETs).
In the case of PETs, you can gift as much as you want, but be aware that if you die within seven years the gift will be subject to IHT based on the tapered relief scale.
As an alternative to gifting any money immediately, you might want to consider setting up a trust to pass money to your heirs. Trusts are generally exempt from any IHT consideration.
7. Investing the money
It’s likely that you’ll want to invest some, or all, of the inheritance you receive.
When it comes to choosing how much to invest and which investment vehicles to use, the two big considerations are investment risk and taxation.
Investment risk
Your choice of investment will be dependent on how long you want to invest the money for and the level of risk you’re prepared to accept in return for potential investment growth.
If you’ve already identified a use for the money and will require access in the short term, then lower risk investment is probably prudent for this sum.
However, if you’re able to invest over a longer period – more than five years – then you should be able to take on more investment risk.
Taxation
As well as ensuring you invest the money in line with the amount of risk you’re prepared to accept, you should also be looking to invest it as tax-efficiently as possible.
As a first and most straightforward option, you should maximise your ISA allowance, which is £20,000 in the 2021/22 tax year. This means that you can save that amount annually with any resulting income and gains being tax-free.
Be aware that everyone over 18 has an ISA allowance, so you should also look to maximise the allowance of your spouse or partner.
Beyond ISAs, your money may be spread between different options to save and take income in a tax-efficient way.
8. Advice is essential
As you’ve probably realised from reading this article, sorting out an inheritance you receive isn’t always a straightforward process.
It’s easy to make mistakes that could cost you, either in lost investment value or an unexpected and unwelcome tax charge.
We would always recommend that you speak to an experienced financial adviser who can help you plan how to deal with the assets you receive and help you avoid some of the common pitfalls.
Get in touch
With offices in both in the UK and Australia, we are ideally placed to help you manage assets you receive as part of an inheritance.
Get in touch to find out how we can help you.
