If you’re a non-resident with property in the UK, inheritance tax is worth paying attention to. Even if you live abroad, UK inheritance tax can still apply to the property you own here, which can impact how much is left for your loved ones. But here’s the upside: with the right understanding of rules, allowances, and smart planning strategies, you can minimize what’s owed.
In this blog, we unpack the essentials, answer some common questions, and help you secure as much of your property’s value as possible for future generations.
Let’s go!
What is inheritance tax and when does it apply?
Inheritance tax (IHT) is charged at 40% on the value of assets above a certain threshold, currently set at £325,000, which is referred to as the “nil-rate band.” This means that if the total value of a person’s estate is below this threshold, no IHT is due; above it, IHT is applied to the excess amount. For example, if a non-resident’s estate includes a UK property valued at £500,000, IHT would apply to the £175,000 above the nil-rate band, resulting in a tax bill of £70,000.
For non-residents, IHT generally only applies to assets located within the UK. If you’re a non-resident who owns property here, the value of that property will be subject to IHT upon your passing, even if your primary residence is abroad. However, certain assets, such as foreign currency accounts held in the UK, may be exempt from IHT
While IHT on UK-based assets is unavoidable, there are allowances and exemptions available that can help reduce the tax burden.
Domicile vs. Residency: How they affect inheritance tax
In the UK, “domicile” is distinct from residency. While residency is based on where you live, domicile considers where you intend to settle permanently. This is important because IHT applies differently based on your domicile status:
- UK Domicile: If you’re deemed UK domiciled, IHT can apply to your worldwide assets, even if you reside abroad.
- Non-UK Domicile: If your permanent home is abroad, only your UK-based assets are subject to IHT.
For example, if a long-term UK expat lives in Australia but has lived in the UK for 15 out of the last 20 years, they might be deemed UK-domiciled, which could make their global assets subject to IHT. Conversely, if they’re settled in Australia with no intention of returning, they may retain their non-UK domicile status, limiting IHT to their UK assets alone.
Key allowances and exemptions to minimize inheritance tax
While IHT can significantly impact an estate, non-residents can take advantage of several key allowances and exemptions:
1. Nil-Rate band: Every estate benefits from a £325,000 tax-free allowance. This means if your estate, including UK assets, is valued below this amount, it’s entirely exempt from IHT. For instance, a property valued at £300,000 would fall within the nil-rate band, resulting in no IHT liability.
2. Spousal transfers: Assets left to a UK-domiciled spouse can double the nil-rate band, effectively raising it to £650,000. For example, if a non-resident holds a UK property valued at £600,000, transferring it to a UK-domiciled spouse can avoid immediate IHT, deferring it until both partners pass away.
3. Excluded property trusts: Non-UK domiciled individuals can establish an “excluded property trust” to hold foreign assets outside the scope of UK IHT. For example, if a non-resident owns shares in a US-based company, placing these in a trust can help shield them from UK IHT. While complex, this strategy can be particularly effective for estates with high-value foreign assets.
Impact of corporate ownership on inheritance tax
For many years, it was common for non-residents to hold UK property in offshore companies to avoid IHT. However, as of 2017, UK IHT now applies to properties held in overseas companies, as well as those owned directly by individuals. This change means that if a non-resident owns a property in the UK through a company registered in a tax haven, it would still be subject to IHT.
For instance, if a US-based investor owns a London property worth £1 million through a Jersey-registered company, this property will still be counted as part of their UK estate for IHT purposes. This shift aims to prevent the use of foreign companies to avoid UK taxes, so understanding these rules is crucial for non-residents considering corporate ownership.
Avoiding double taxation on UK property
Double taxation can be a challenge for non-residents who own property in the UK, as both the UK and the individual’s home country may seek to impose inheritance tax on the same asset. However, double taxation agreements (DTAs) between the UK and certain other countries aim to prevent this by offering tax reliefs or credits.
These treaties often give the UK the “primary right” to tax property physically located within its borders, while the home country provides a credit for any UK inheritance tax (IHT) already paid. For instance, if a US citizen with a London property valued at £700,000 pays IHT in the UK, they can claim a tax credit in the US, avoiding an additional tax burden there. The US-UK DTA specifically provides this type of credit to protect the estate from being taxed twice on the same asset.
To make the most of these agreements, non-residents should confirm if their home country has a DTA with the UK. Some steps for utilizing these agreements include:
- Identify applicable DTAs: Research if a DTA exists between the UK and your home country. Countries like the US, France, and Spain have specific treaties with the UK covering IHT.
- Claim tax relief in Your Home Country: After paying UK IHT, a non-resident may need to submit documentation to claim a tax credit back home. For instance, a US citizen would file Form 706-NA to report the UK IHT and request a corresponding tax credit.
- Seek professional guidance: DTAs can be complex, especially when handling cross-border estates. Consulting a tax expert ensures compliance and helps maximize reliefs available under these treaties
Upcoming IHT Changes in 2025: What Non-Residents Need to Know
Starting in April 2025, the UK government plans to shift from domicile-based IHT to a residence-based IHT test. Under the proposed changes, non-residents who have been UK residents for 10 years or more may see their non-UK assets included in the UK IHT net, even if they are not officially domiciled in the UK.
For instance, a non-resident who has lived in the UK for 10 years, then moved abroad but still has family ties or property here, might be considered a UK resident under the new rules. As a result, their worldwide assets could become subject to IHT, making tax planning even more critical. This change is still under consultation, so keeping up with the latest updates is essential if you’re a non-resident with UK ties.
How Know Your Dosh can support your legacy planning
Inheritance tax planning can feel overwhelming, especially with ongoing changes in tax law. At Know Your Dosh, we make it easy to keep all your financial information organized in one place, simplifying the legacy planning process. With our secure platform, you can document your assets, property ownership, and financial plans, ensuring your loved ones have access to clear and organized records. From managing property to tracking investments, Know Your Dosh helps you plan for the future with peace of mind. Start here.
Disclaimer:
We think you should understand this blog’s strengths and limitations. We’re a financial management platform and aim to provide the best personal finance and lifestyle guidance but can’t guarantee it to be perfect, so please use the information at your discretion.
“Know Your Dosh” can and shall not be held responsible for any outcomes derived from following general guidelines provided as informative blogs.
This info does not constitute financial advice, always research and consult a professional financial advisor before taking any action to ensure it is right for your specific circumstances.
Know Your Dosh blogs often link to other websites, and can’t be held responsible for their content.
Always remember anyone can comment on our posts so it can be very different from our opinion.
