michali

The more I read about UK laws, I get more confused and concerned about my future! I am a UKC married to a non-eu man but we are non-resident in the UK. I have not lived there since 1969 apart from two years from 1998-2000.

We have been discussing recently, in the light of our age (late sixties and early seventies) how our children can benefit from our assets when we die. If I die first, Inheritance Tax will not apply but if my husband dies first, then it certainly will! Our assets will most likely be above the threshold as we have two flats on rent in London and some cash here and in the UK. It is pretty definite that I would return to the UK to reside should my husband pre-decease me as I would need to be near our two adult children.

What mostly concerns me is that the Inheritance Tax has to be paid BEFORE any benefits from the estate can be passed onto our children. How on earth would they find the money to pay this if the estate is comprised mostly of property, which cannot be sold until the whole process is complete??

No wonder people just spend all their money and enjoy themselves! We will be gifting money to our children and grandchildren within the threshold allowed but that will not solve the problem of the whole estate being assessed when the time comes.

I understand I could change my domicile but that that is not easy either, particularly as we have bank accounts and property in the UK and the fact that I would have to return there if I am widowed.

I should add that, as non-residents, we do submit tax returns each year.

Any advice please from fellow expats?

Pistolpete2

Don't like to stick my neck out too much on tax issues but will try to help, even though these types of questions normally warrant getting professional advice.

Where do you currently regard yourself/yourselves as being domiciled?

If you are both not domiciled, only the Uk assets are subject to tax. If you are indeed not domiciled, you could transfer the properties to an offshore company since the shares that you own in the company would not be subject to tax, but the advantage of this could be at least partially negated if you ultimately chose to return to the UK post your spouse's decease. You would need professional advice on this, I think.

If one of you is domiciled and the other is not, the domiciled can will the Uk assets to the non-dom and get 380,000 (325,000 + 55,000) in reliefs (not 650,000 see below). The 55,000 becomes another 325,000 from April 6th, 2013, so will be on an equal footing with both being domiciled.

If you have wills and are domiciled then at present, by willing your assets to the surviving spouse there is no inheritance tax liability until the survivor then dies when the threshold becomes (at present) 650,000 (325,000 twice over).

Indeed, almost certainly, if inheritance tax is payable it will need to be funded by a property disposal. Therefore, if the London properties come to well in excess of the total threshold and you can afford to transfer a degree of ownership and the related income to your children then you should consider this to reduce any tax liability. The earlier the better.

You say that as non residents you file tax returns every year but it is actually as persons with UK arising Property Income and other income that you are obliged to file UK tax returns every year. When you file, do you also fill out the Residence/Domicile section, which helps HMRC establish domicile?

michali

That is helpful, thanks! Even though in some ways I consider myself non-Dom, particularly with my extreme disgust at the new rules, I really cannot say I am non-Dom because of my ties with the UK, children, grandchildren, property and bank accounts and the fact I would have to go back to live if my husband pre-deceases me. Whatever my personal feelings, I am not sure my case would stand up in a court of law.

I could find ways to dispose of some assets upon my return to the UK but would be concerned, not even so much about having to pay inheritance tax, but how my children would find the money upfront to pay it. Either that or pay monthly and then pay interest on top of that!

I wonder if by giving my children POA if I do back to live, they could then access an account to retrieve funds to pay IHT when I die.

As non-Dom, my husband should not have to pay IHT anyway, surely?

I agree I need professional advice on this but was interested to hear others' views in the meantime.

Pistolpete2

Is there somewhere else that you could honestly say you are domiciled. If no, then I guess it has to be the UK. Residence/ordinary residence is more about family ties - definitely NOT bank accounts or the ownership of property, but residence in that property is a different kettle of fish if the residence is on a long-term basis.

Everybody is subject to inheritance taxes on subject (e.g. real estate, stocks, cash etc.) assets they own in the UK whether domiciled or not. It's just that non-doms who own shares in a foreign company which owns the UK property would not be subject because the shares are not in the UK.

Pistolpete2

It's a dreadful thing that if you penetrate the exemption threshold you are immediately subject to the 40% tax - there is no sliding scale.

This makes it important to consider the implications early and get the right wills sorted out and other necessary tax planning in hand.

Forgoing rent on a property pales in comparison to a 40% tax on its true and proper value.

michali

My heart is domiciled in The Bahamas though, apart from my husband, I have no family here.

Is it so that a non domiciled in UK would still have to pay inheritance taxes on UK assets? Guess the difference is that a non-Dom would not pay the tax on any assets here? Might as well go out and spend the lot! Can't give it to my kids without their having to pay taxes on it. There really is no incentive to save for your children!

Pistolpete2

What taxes would they be?

They only pay taxes if you die within the window of exemption from liability - up to seven years.

Then they only pay taxes on any income or capital gains.

Doesn't seem like an incentive to spend it all - to me.

michali

Unfortunately, the chances are that we may die within the seven years as we are cancer patients/survivors. But I still think it is worth looking at. Our whole intention is to help our children without causing them any problems. As you can see I really do not understand this whole tax system well.

Pistolpete2

Here is more detail ref the seven year rule:

Applying ‘Taper Relief’ to gifts

Inheritance Tax is charged on gifts at 40 per cent. But if the person died between three and seven years of making a gift, you can apply what's known as 'Taper Relief' to the amount of Inheritance Tax due to reduce the amount payable.

Taper Relief reductions

Time between the date the gift was made and the date of death

Taper relief percentage applied to the tax due

3 to 4 years
20%

4 to 5 years
40%

5 to 6 years
60%

6 to 7 years
80%

Example

Joe made a gift of £350,000 on 15 January 2006. He died on 15 April 2009. The Inheritance Tax threshold for the year he died is £325,000.

Follow the steps below to work out the Inheritance Tax due:
Step one: take away the threshold from the value of the gift: £350,000 − £325,000 = £25,000. So Inheritance Tax is due on £25,000

Step two: work out the Inheritance Tax at 40 per cent: £25,000 × 40 per cent = £10,000

Step three: the gift was made within three to four years of death. So Taper Relief at 20 per cent is allowed: £10,000 × 20 per cent = £2,000

Step four: take away the Taper Relief from the full tax charge: £10,000 − £2,000 = £8,000

In this example, Taper Relief reduces the amount of tax payable from £10,000 to £8,000.

michali

Thanks! The answer to our problem is to make the gifts as soon as possible and stay alive for at least seven years!

JAJ

Check with an English solicitor to be sure, but I thought it's possible for an executor to sell property, pay the Inheritance Tax, and then distribute the remaining cash to the beneficiaries. Of course, the property doesn't remain intact but perhaps that is not a problem.

You'd have to return if widowed? That means your domicile hasn't changed, normally. On the other hand, you tell us you're in the Bahamas, so if you have a permanent resident permit or Bahamian citizenship, plus a firm intention to remain in the Bahamas for the rest of your life, then you may have a chance of claiming a change of domicile.

In any case, Inheritance Tax will always apply to U.K. situated assets. Also be careful about transfers to your spouse, as the normal exemptions don't apply if spouse is non-U.K. domiciled.

Pistolpete2

Have already addressed that and the changes that are in place eff April 6th,2013.

michali

Thanks, JAJ for your comments and advice. When you say exemptions do not apply to non UK domiciled spouse, what does this refer to? I understand I cannot transfer property to my husband.....everything we have is in joint names anyway. Are you just saying that he will still have to pay inheritance tax on the UK assets? I am now aware of that but is there anything else I should know about?

Pistolpete2

JAJ posted without checking the posts from the ONE respondent who has been assisting you in this matter and without checking favourable updates regarding transfer to a non-domiciled spouse which were implemented in April 2012 to take effect next April, 2013.

michali

I am sure JAJ had the best of intentions! Thank you though PistolPete2 for all your helpful advice.