UK Inheritance Tax & Domicile - What Expats Need to Know

Editorial Lifestyle
Did you know UK inheritance tax is based on domicile, not residence? Even if you live in Portugal for some time, you could still be liable for UK inheritance tax. Estate planning can help you make the most of exemptions and allowances, reducing the tax bill for your family and heirs.

Being a tax resident in Portugal does not exempt you from UK inheritance tax as many British expats are UK domiciled. A complex issue, expert advice is highly recommended to review your estate planning to ensure it delivers your wishes as tax efficiently as possible.

In the article below Adrian Hook, partner at Blevins Franks, explores the issue of inheritance tax for expats. Blevins Franks provides expert wealth management advice on cross-border tax issues, estate planning, pensions and investments to their clients in Portugal and across Europe. With offices in Loulé, Algarve, (as well as in Lisbon), Blevins Franks offers integrated advice and financial services to expats living in the Algarve and the rest of Portugal.
Find out more about Blevins Franks

UK inheritance tax and domicile – what expatriates need to know today
By Adrian Hook, Partner, Blevins Franks
UK inheritance tax follows you around the world, since it is based on domicile, not residence. You could live in Portugal long term and still be liable for this legacy tax.   
HM Revenue & Customs (HMRC) collected £500 million from inheritance tax (IHT) in April 2022 alone – £10 million more than April last year and the highest amount for the first month of a tax year for the last five years.
This figure is expected to keep growing, especially with tax thresholds frozen until 2026 and house prices climbing.  In fact, the Office for Budget Responsibility (OBR) forecasts that HMRC will earn around £37 billion from IHT over the next five years.   More and more families will get caught in the inheritance tax net and the amount they’ll pay will increase too.
It is therefore definitely worth taking a little time now to review your inheritance tax situation and take steps now to reduce this unwelcome tax liability for your family and heirs.  Make sure your estate planning is set up to make the most of the available exemptions and allowances, as well as the tax planning opportunities to reduce or eliminate your liabilities.  Don’t rely on IHT planning set up years ago; you need to review your estate planning regularly to ensure it is up to date and remains on track to achieve your wishes.
Key facts about UK inheritance tax
  • UK IHT is charged when assets are transferred to someone else, usually on death but also potentially on lifetime gifts.
  • It is calculated and charged on your worldwide estate. This includes all property you own including your home; bank accounts; investments; insurance policies not in trust; household contents; jewellery; vehicles etc. Outstanding mortgages and loans are deducted from the total.
  • Being tax resident in Portugal does not exempt your estate from this tax.  Your estate is liable for as long as you remain a UK domicile – and many British expatriates are UK domiciled their whole life. Domicile is a complex and adhesive UK common law concept. The basic rule is that a person is domiciled in the country in which they have their permanent home – the country regarded as your ‘homeland’. For example, HMRC could deem you a UK domicile if you intend to be buried there.  
  • You can take steps and cut ties with the UK to adopt a domicile of choice in Portugal, though it can take up to four years to shed a UK domicile for inheritance tax purposes. Note that you cannot ask HMRC for a ruling on your domicile status, it will only be established on your death. So you need specialist domicile determination advice.
  • Assets situated in the UK are always liable to UK IHT, regardless of domicile.
  • The IHT tax rate is a flat 40% (reduced to 36% if at least 10% of the estate is left to charity).
  • Transfers to spouses and civil partners are exempt from UK inheritance tax provided you are both UK domiciled.  If one of you is domiciled outside the UK, their exemption is limited to the nil rate band.
  • The standard inheritance tax nil rate band (or threshold/allowance) is €325,000.  Any unused amount on the first death can be transferred to your spouse/civil partner, potentially giving your joint estate an allowance of up to €650,000 on the second death.
  • In addition, the ‘residential nil-rate band’ (RNRB) can provide an extra £175,000 allowance for a property that is, or has been, your main home (but only on one property). It applies to homes outside the UK too. But there are limitations. It is only available if you leave the property directly to children or grandchildren (so be careful with trusts).  Also, the threshold is reduced for estates valued over £2 million. At this point it starts tapering off until it is eliminated completely – currently for estates valued over £2.4 million (this is the whole estate, not just property).
  • While the thresholds are meant to rise with inflation, the 2021 UK budget froze both these thresholds until at least April 2026.   The main £325,000 allowance has in fact been frozen for 13 years, since 2009, resulting in more families paying more tax – freezing allowances can have the same effect as cutting them.
Ask a specialist, cross-border wealth management adviser to review your inheritance and estate planning to confirm it is on the right track to meet your wishes for your family and heirs. They should analyse your inheritance tax liability and recommend solutions to reduce your exposure as much as possible. At the same time ask for guidance on Portugal succession law and the local inheritance and probate process, to help you take steps now to ensure your estates is divided according to your wishes and to make life easier for your beneficiaries.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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This article was originally published by Blevins Franks.