UK Inheritance Tax for Australians – what you need to know

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As a firm who specialises in advising clients with connections in both Australia and the UK, one of the most common subjects we’re asked about is UK Inheritance Tax.

In simple terms, if your estate is worth more than £325,000 on your death, there could be up to 40% tax to pay. However, much depends on your domicile status in the UK.

Your domicile is the country which you officially have as your permanent home or have a substantial connection with.

When you’re born, you’re automatically assigned to the same domicile as your parents, defined as your ‘domicile of origin’. Your domicile of origin then continues until you acquire a new domicile. Even if you have moved abroad, unless you take specific action, it is unlikely that your domicile will immediately change.

Taking professional planning advice based on your specific circumstances is crucial, but here’s a brief guide to the basics you should know.

The Inheritance Tax benefits of being non-domiciled (a ‘non-dom’)

Even if you have been resident in the UK for a few years, you may still be non-UK domiciled. Under English law, you may have been UK resident for some time, and may even have acquired British nationality, and yet you may still have a domicile outside the UK.

As far as UK Inheritance Tax (IHT) is concerned, being non-UK domiciled is a huge advantage.

When someone who is UK-domiciled dies, their entire worldwide estate is subject to IHT. The tax applies at 40% to assets both within and outside the UK, other than any part of the estate that either:

  • Passes to a surviving spouse
  • Fall within the current nil-rate band (£325,000 in the 2020/21 tax year).

Conversely, if you’re non-domiciled (a ‘non-dom’), when you pass away IHT only applies to your UK assets as long as you are not deemed domiciled in the UK.

The only notable exception to this relates to non-UK assets which derive their value from UK residential property or have been provided as collateral for a loan used to acquire or improve such property. These assets are effectively deemed to be UK assets for the purposes of calculating IHT.

The same principles apply to gifts. A UK domiciled person will potentially pay IHT on a gift they make if they die within seven years of making the gift.

If you are non-UK domiciled, you will pay no IHT on such a gift, even if the gift is one which would potentially give rise to an immediate IHT charge for a UK domiciled person. Note again the exception for assets relating to UK residential property,

Examples of gifts include:

  • Gifts to UK trusts
  • Contributions to pensions
  • Gifts to family
  • Buying a non-UK property for a child and allowing them to live there rent-free
  • Gifts to charities outside the EU

You could also consider steps such as paying off your child’s university debt or paying for significant purchases, such as holidays.

How ‘deemed domicile’ works in the UK and what to look out for

A ‘deemed domicile’ is normally acquired if you’re a non-UK domiciled individual and you have been UK resident in 15 of the 20 preceding tax years. If you have a foreign domicile, you will therefore typically become deemed domiciled for IHT purposes at the beginning of your 16th tax year of residence in the UK.

Becoming ‘deemed domicile’ in the UK is crucially important as it means that the scope of IHT extends from UK assets to all assets on a worldwide basis. If you have a non-domicile status in the UK, only UK based assets will be liable to inheritance tax in the UK.

This is relevant not only in the event of your death, but also if you make lifetime gifts, especially gifts to trusts or trust-like entities.

You can lose deemed domiciled status if you leave the UK and there are at least six tax years as a non-UK resident in the 20 tax years before the relevant tax year.

How an ‘excluded property trust’ can help

As mentioned above, you will generally lose your favoured IHT status once you become deemed domiciled. At this point your non-UK assets will fall within the scope of IHT.

One way to mitigate this tax is by using an ‘excluded property trust’.

Here, if you’re a non-dom and you gift non-UK assets to an excluded property settlement before you become deemed domiciled, these assets will remain outside the scope of UK IHT even after you deemed domiciled (or UK domiciled). Additionally, these assets will remain outside UK IHT even beyond your death, protecting these assets from IHT for future generations.

Normally you would be a beneficiary of the trust, and it would ordinarily be revocable, so that you can bring it to an end at any time.

An excluded property trust with non-UK resident trustees also offers additional Capital Gains Tax advantages.

Income and capital gains can, therefore, accrue inside the trust without tax being paid on them.

Get in touch

Tax and domicile are complex areas and that’s why it can pay to take professional advice. At bdhSterling we have licences in both the UK and Australia for full financial planning and so we can provide bespoke advice based on your specific circumstances.

Feel free to contact us for a no obligation chat. Get in touch if you would benefit from advice.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.