Finance

How British Expats with Non-UK Domiciled Spouses Can Reduce UK Inheritance Tax Liability

This is a sponsored post.

You may have heard the old adage that says the only two certainties in life are death and taxes… But is that still necessarily true? Life expectancy is increasing dramatically across the world, and we can function extraordinarily well into our 90s and even beyond. Dr Mahathir, Queen Elizabeth, and Sir David Attenborough are all hugely influential individuals in their 90s, and with Elon Musk’s Neuralink having the potential to reverse disabilities and even blindness, who knows just how far we can go. Exercise, diet, and even fasting is now prescribed by some doctors to improve longevity, and I saw an interview with a doctor claiming that the first person to live to 1,000 is likely already alive today! Maybe death isn’t such a certainty, after all.

Taxes (for almost everyone) are inevitable. UK Inheritance Tax (IHT) potentially applies to anyone who was born in the UK, no matter how long you’ve been overseas. It’s often called a voluntary tax because with careful planning, it can also be avoided.

If you’re married to another UK domiciled individual, the tax can be deferred until death. However, it’s worse if your spouse is non-UK domiciled (a non-dom) because you can only potentially leave them £650,000 of your worldwide estate. The rest is potentially liable to IHT at 40%. In order for Probate to be granted and the estate made available to your beneficiaries, the tax has to be paid first. Readily available cash can be used to pay the tax, but assets cannot be sold. If cash isn’t available, then usually an expensive bridging loan is used to pay the tax.

But what if being married to a non-dom could be advantageous? Excluded Property is the technical term used within UK IHT legislation to describe assets which are exempt from IHT. Excluded property trusts apply to non-UK domiciles who reside in the UK or who plan to reside in the UK in the future.

A non-UK domiciled individual becomes UK deemed domicile when they have been resident for 15 out of the last 20 years. Before becoming UK-domiciled, they are subject to the lifetime limit for assets that can be transferred to them, exempt from IHT, by a UK domiciled spouse, which is currently £325,000. This is in addition to the nil rate band (NRB) of £325,000.

An excluded property trust can be an invaluable estate planning tool for expats planning to retire to the UK with their foreign spouses. They also apply to those who plan on never repatriating but are married to a non-dom.

Professional financial and tax planning can be a huge benefit to expats | Image Credit: amazonaws.com

Excluded property trusts are subject to two conditions:

  1. The settlor must be non-UK domiciled.
  2. The assets of the settlor must be outside the UK. They are often held in offshore bonds in jurisdictions, such as the Isle of Man.

The trust assets are exempt from IHT, provided the above rules apply. A quirk of excluded property trusts are that the Settlor (the person who establishes the trust) can also be a beneficiary. The trustees control of the assets. Of course, investments within the trust can be diversified in order to spread risk.

As ever with estate planning issues, this is quite a difficult concept, so here’s an example of a situation in which an excluded property trust could be useful:

John, a British expat, has been working overseas for 15 years in various locations and is now living in Malaysia. He is married to Farah, a Malaysian (non-UK domicile), and they have two children. They are unsure where they will retire to in the future, possibly the UK. John has accumulated wealth of £1m and, as he is UK domiciled, will be liable to UK IHT, even though he’s been overseas for 15 years.

After taking into account John’s NRB of £325,000 and the spousal exemption of £325,000, £350,000 of his estate is subject to UK IHT @ 40%. If John died today, that’s a tax bill of £140,000.

Solution: John gifts Farah £350,000 which she then invests into an excluded property trust. Farah is the settlor of the trust as a non-dom but both John and Farah are trustees and, more importantly, beneficiaries. The monies were originally in John’s name but he can also benefit from the Trust as a beneficiary and control the assets as a trustee. After seven years have passed, not only have they saved £140,000 in IHT initially but any growth within the trust is exempt from IHT too so the potential savings could far exceed this amount.

Personally, I’m not sure that I’d want to live to 1,000, but I would like to protect my hard-earned assets from the tax man where legally possible and ensure they’re available for future generations.

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Recently, I’ve come across a number of clients in the above situation and we’ve established Excluded Property Trusts as part of future tax and income planning strategies so that we can protect hard-earned assets. They’re not suitable for all, but if you are British and married to a non-dom, please feel free to get in touch for more information.

This sponsored post was contributed by Jamie Bubb-Sacklyn. Jamie is a Chartered Financial Planner and strives to raise the standards of international financial planning in Malaysia and Asia. You may direct any inquiries to [email protected] or call +6014.734 6689. LinkedIn: linkedin.com/in/jamiebubbsacklyn




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