UK inheritance tax

The standard inheritance tax nil rate band has been frozen at £325,000 since 2009. | EFE

Cathal Rochford, Partner Blevins FranksPalma07/08/2023 10:04
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The 2022/23 tax year was yet another record year for UK inheritance tax (IHT) receipts. HM Revenue & Customs received an extra £1 billion over the tax year, generating a total of £7.1 billion. The number of people paying this tax jumped 24%. The government expects IHT revenue to continue to increase, bringing in £38 billion over the next five years.

Frozen reliefs and rising property prices

The standard inheritance tax nil rate band has been frozen at £325,000 since 2009. It is scheduled to remain fixed until April 2028. In contrast, house prices have risen, pushing more estates into the IHT net.

The residential nil-rate band (RNRB) introduced in 2017 to help protect families, has limitations. It applies where a main residential home passes directly to children and grandchildren and the estate is valued under £2 million. A tapering system for higher estates eliminates the RNRB entirely when they exceed £2.35 million. The current £175,000 allowance is also frozen until 2028.

Who inheritance tax affects

UK IHT is charged on death and lifetime gifts. For UK domiciles it applies to their worldwide estate, regardless of residence. Non-UK domiciles are assessed on UK assets.

Liability is calculated on your entire estate – property, investments, insurance policies not in trust, household contents, jewellery, vehicles etc. Outstanding mortgages/loans are generally deducted from the total.

If the total value of your estate exceeds the thresholds, your heirs pay 40% tax on the excess. Where the allowances are not or partly used on the first death, the balance is transferred to the surviving spouse – make sure you take full advantage.

Expatriates and domicile

UK inheritance tax follows you to Spain since your estate is liable for as long as you remain a UK domicile. Domicile is a complex and adhesive UK common law concept, and many British expatriates are UK domiciled their whole life.

You can, however, take steps and cut ties with the UK to adopt a domicile of choice in Spain, though it can take four years to shed UK domicile for IHT purposes. Professional advice is essential here.

Inheritance tax planning

There are various steps you can take to eliminate or reduce your IHT liability for your heirs. Cross-border estate planning can be a minefield especially when also subject Spanish succession tax – so take specialist advice to get it right and take advantage of the planning opportunities available.

Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.

Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com