Assets in the UK or are you from the UK? Inheritance tax and succession planning tips

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By James Whiley

Many people think that moving to Australia means they no longer need to worry about UK tax, but often they are not fully aware of the tax and in particular the inheritance tax implications. Similar issues can arise for Australians owning UK assets. Owning assets in both countries can also complicate your succession planning. In this next instalment of our international succession planning series, we consider these issues.

What is inheritance tax and when does it apply?

An individual’s domicile status will determine their liability to inheritance tax (IHT), as the UK imposes IHT at 40% on the value of their estate above their available nil rate band (currently £325,000, but with the potential to transfer this to a spouse, if unused, to have a combined £650,000 and possible additional £175,000 each (for 2022), for a main residence nil rate band), according to domicile rather than residence.

Transcript

James Whiley

[Transcript]

Many Britons have moved to Australia, myself included, and often retain assets originally in the UK, but they often think they don’t need to worry about UK tax issues anymore.

Conversely, many Australians often acquire assets in the UK or live there, and similar issues can apply. We consider inheritance tax and UK estate planning.

First of all, what is inheritance tax and when does it apply?

The UK imposes inheritance tax according to your domicile position.

You’re born with a domicile of origin, which follows that of your father, if your parents were married at the time of your birth, but you can acquire what’s called a domicile of choice.

For example, if you move to Australia and acquire the intention to reside here permanently indefinitely, noting that it’s state based.

For inheritance tax purposes, this is very important, as if you are still considered domiciled in the UK, by the UK tax authorities, they will impose inheritance tax on your worldwide estate. Whereas if you are accepted to be domiciled, for example, in New South Wales, then you will only be subject to inheritance tax on your UK assets.

The difference is significant because inheritance tax is charged at 40% above a nil-rate band of £325,000. There are certain exemptions for transfers between spouses and a small, nil-rate band exemption as well for your home.

If you are subject to inheritance tax, what can you do? There are certain strategies to reduce the estate that’s subject to inheritance tax, for example, making outright gifts to family members or lifetime giving.

If we consider that you’ve acquired a clear domicile of choice in New South Wales, we may also recommend preparing what’s called a statutory declaration of domicile, which is used as formal evidence if HMRC [Her Majesty’s Revenue and Customs] were ever to dispute your domicile status after your death.

What to do about UK estate planning?

So fortunately, the UK and Australia will recognise Wills prepared in each country.

So, it’s possible to have one Will covering both countries. But it’s often advised, particularly where you have significant assets in both countries, to have separate Wills, because this means you can get a grant of probate obtained in both countries at the same time, rather than having to get one in one country and then get that resealed in the other, which can take more time and expense.

Even if you can get by with a worldwide Australian or UK Will, it’s also important to have local incapacity documents prepared, as they will only be recognised in each country.

How can Hall & Wilcox help you?

We regularly deal with clients who are originally from the UK or with assets in the UK.

So, although we can’t provide UK tax advice, we’re very aware of the issues and work with advisors in the UK where required, to make sure that your estate planning is appropriately structured from Australian and UK tax and estate planning perspective.

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There is no single definition of ‘domicile’ and it is generally established according to where you were born and follows that of your father at the time of your birth, assuming your parents were married. However, if an individual is British, but considers Australia to be their permanent or indefinite home, they may have acquired an Australian domicile of choice, although it will depend on the facts.

The difference is that if the individual still has a UK domicile of origin, they will potentially be liable to IHT on their worldwide estate (and anything they transfer into a trust can be caught too with a 20% IHT entry charge and 10-year anniversary and exit charges of up to 6%). However, if they have acquired an Australian domicile of choice or have an Australian domicile of origin, they will only be liable to IHT on their UK estate and anything they transfer into a UK trust.

Transfers between spouses are also exempt, provided they have the same domicile status. However, transfers to a non UK domiciled spouse (for example, to an Australian spouse), from a UK domiciled spouse are only exempt up to £325,000 unless the non-domiciled spouse elects to be treated as UK domiciled.

What to do about IHT planning

Some common strategies for individuals with an IHT exposure include:

• preparing a statutory declaration of domicile as evidence of Australian domicile of choice for Britons living in Australia who consider Australia to be their permanent or indefinite home and who have lived here for at least three UK tax years (so are not UK deemed domiciled under the three year rule), although Her Majesty’s Revenue and Customs (HMRC) will still consider the facts, as domicile is a complex area of law;
• IHT effective lifetime giving – each individual is able to make:
  • £3,000 worth of gifts per year plus £250 to any number of individuals;
  • regular gifts out of income (which varies according to circumstances);
  • potentially exempt transfers (ie absolute gifts), which are exempt if the individual survives for seven years (with tapered rates applying in between);
• encumbering property liable to IHT with debt, as IHT is due on the net value of an estate, but complex rules apply to this now;
• making gifts to UK charities in a Will (which are IHT exempt); and considering if any properties qualify for Business Property Relief or Agriculture Property Relief.

What about estate planning?

If you own assets in the UK and Australia, it is important to consider whether to have Wills and the equivalent of enduring powers of attorney in the UK and Australia, or just one country.

Although an Australian Will is recognised in the UK and it is possible to have an Australian grant of probate resealed in the UK, this makes the administration of an estate more complicated and lengthier, as the Australian grant of probate needs to be obtained first. Having separate Wills mean you can obtain probate concurrently to save time.

For this reason and to ensure both Wills work best from a local tax planning perspective, it is best practice to have Wills in the UK and Australia (which must be carefully drafted to ensure that one does not accidentally revoke the other) particularly where an individual owns significant assets in both countries.

Even if an individual decides to only have one worldwide Will, it is also important to have the equivalent of an enduring power of attorney in the UK (known as a lasting power of attorney), as an Australian enduring power of attorney will not be recognised in the UK.

How can Hall & Wilcox help?

This article was written by James Whiley who is admitted as a solicitor in New South Wales and England and Wales and practiced in tax and succession planning in London. Although Hall & Wilcox is unable to provide UK tax and legal advice (and this article should not be relied upon for UK or Australian tax and legal advice), we are aware of the UK issues and regularly work with trusted UK law firms to provide a tailored approach for each client, which works from a UK and Australian tax and succession planning perspective.