How UK inheritance tax affects residents living in the UAE

The tax regime should not be a deterrent to moving to the UK or to holding assets in the country

Inheritance tax can be a "hefty" sum but there are allowances. Getty Images
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With the UK heading into an extremely unusual December election, inheritance tax has again become a political hot potato.  On the one hand, Jeremy Corbyn’s Labour party have mooted changes to the system, which would result in more UK taxpayers paying inheritance tax. On the other, the current conservative chancellor Sajid Javid has hinted at the possibility of scrapping inheritance tax altogether.

After death, up to £325,000 (Dh1.5 million) can be passed on free of inheritance tax but for those who are resident and domiciled in the UK the balance of their worldwide assets is chargeable at 40 per cent.

Don’t get too excited by these bold ideas … inheritance tax is often talked about by UK politicians but sweeping changes are rarely made. Abolishing inheritance tax would be too controversial for a conservative government; while it may please its members, it wouldn’t win many new votes. Equally, by increasing the net of those caught by inheritance tax, Labour risks alienating the swing voters of middle England whose votes they ultimately need.

These are peculiar times in British politics but, if we assume that once again changes to inheritance tax will turn out to be political hot air, instead of speculating on what may — or more likely what may not — happen, it is more helpful to consider the reality of the regime we have. While inheritance tax often gets a bad press, it shouldn’t be a deterrent to moving to the UK or to holding assets in the UK.

The bad news

Inheritance tax, if it applies, is a hefty tax. After death, up to £325,000 (Dh1.5 million) can be passed on free of inheritance tax (so £650,000 for a couple) but for those who are resident and domiciled in the UK (in essence those born and raised in the country) the balance of their worldwide assets is chargeable at 40 per cent.

If the estate includes a home and the circumstances are right, a couple’s tax-free allowance can be as much as £950,000 (increasing to £1,000,000 in April 2020).

If you are not domiciled in the UK, then you pay the same rates and have the same allowances but only on assets that are situated in the UK or are outside the UK but derive their value from UK residential property - for example, shares in a company in the UAE which owns a London flat.

The better news

There are ways to minimise the exposure of inheritance tax for your heirs, even if you are domiciled in the UK.

• You can gift unlimited value away to the next generation — or anyone you choose — during your lifetime and, provided you survive the gift by seven years, there is no inheritance tax when you die … as long as you have not continued to benefit from the asset after giving it away.

• Assets passing between spouses are not subject to inheritance tax.  This ensures that on an unexpected death, provided your wills are drafted appropriately, there is no immediate inheritance tax and the survivor has time to consider making gifts.

If you are considering purchasing UK residential property then it is sensible to consider having UK advice and, in many cases, a UK will to ensure your exposure to inheritance tax is limited.

If you are thinking of investing in UK assets that are not residential property, holding these indirectly will limit your exposure to inheritance tax. For example, instead of owning an office in London you own shares in a non-UK company that in turn owns the office.

The best news

It gets better still … for those not UK domiciled considering moving to the country for an extended period, after 15 tax years of residence you will automatically be subject to the tax on your worldwide assets. However, for those first 15 years of residence, provided you have not formed an intention to remain in the country indefinitely, you are still only subject to UK inheritance tax (and to certain extent other taxes) on UK assets.

Before you have been UK resident for 15 years and before you decide to remain in the UK long-term, you can take steps to keep your assets outside the UK inheritance tax net.  For example, non-UK assets transferred to a trust (which you can benefit from) remain beyond the scope of inheritance tax, potentially for many generations. These trusts are commonly called excluded property trusts as the property in them, provided it is not situated in the UK, is "excluded" from inheritance tax.

In the 2018/19 tax year, inheritance tax earned the UK government £5.3 billion. It is unlikely any government is going to scrap something so lucrative but equally they are unlikely to change it when any tweaks would be unpopular with wavering voters.

If the system remains largely as it is, inheritance tax should not be a deterrent.  Provided advice is taken then there is no reason that families thinking of moving to the UK or investing in the UK should ever pay substantial sums of inheritance tax.

Paul Fairbairn, partner in the private client team of UK law firm Cripps Pemberton Greenish