From April 2025, UK inheritance tax will undergo the biggest change since it was invented.
If you’re living overseas, you’ll be one of few people who can substantially benefit.
In the past, UK Inheritance Tax was based on where you were born.
This meant as a British citizen, you would pay UK Inheritance Tax on your worldwide assets when you die.
Not matter where you live, no matter where these assets are held.
But from April 2025 it’s moving to a residence-based regime.
What does this mean for expats?
Once you’ve lived overseas for 10 years, only your assets in the UK will be subject to UK IHT.
But for any assets left in the UK, you’ll have a significantly reduced IHT Nil Rate Band of only £325,000.
Losing the Residence Nil Rate Band and most probably losing the IHT exemption from gifting UK assets to your spouse.
This means any UK assets valued over £325,000 will be subject to 40% IHT on your death.
So you need to consider moving assets like cash, investments, property and pensions outside of the UK, to shelter them from UK Inheritance Tax.
What if I’ve spent time living in the UK and abroad?
If you’ve spent time living inside and outside of the UK, you need to have been non-resident for 10 out of the last 20 years, to qualify as non-resident for UK IHT purposes.
This means if you’ve already spent 10 consecutive years overseas, and you move back to the UK, you need to live there for 10 consecutive years, before your worldwide assets will be subject to UK IHT again.
What should I consider when moving assets abroad?
Whilst moving assets abroad can mitigate UK Inheritance Tax, it’s important to understand if any local inheritance or estate taxes may be due in the country where you live.
Many countries offer concessions to resident expats for assets held offshore.
But they may apply local estate or inheritance taxes, if you keep your wealth in the country you live in.
So whilst you’re from the Country A, and live in Country B, it could make sense to keep your liquid assets in Country C – a well regulated and tax-friendly third country.
How can I protect myself from IHT, if I haven’t yet lived overseas for 10 years?
If you haven’t yet met the 10 year threshold, there’s a low cost solution that can mitigate UK inheritance tax until you’ve met the required years abroad.
Term Life Insurance
Let’s look at an example:
Barry & Jess are 60 years old, they have decided to follow the headlines about ‘Dying in Dubai’ to avoid UK inheritance tax.
They’ve bought a property in the UAE. And qualified for golden visas, which last for 10 years before Barry & Jess need to renew them.
Barry & Jess have moved their cash and investments, to an offshore investment account, based in Jersey (outside of the UK for IHT purposes).
And their worldwide assets are valued at £3,000,000.
Barry & Jess have combined UK IHT Nil Rate Bands & Residence Nil Rate Bands of £1,000,000.
So only £2,000,000 of their worldwide assets is in scope for UK IHT.
But until they have lived overseas for 10 years, Barry & Jess could still face a UK Inheritance Tax bill of £800,000.
Whilst they don’t plan on dying, they wants to make sure they’re covered for the unexpected.
Barry & Jess purchases a Term Life Insurance policy. This will pay out £800,000 if they both die in the next 10 years.
This costs them £595 per month. At £19.56 per day, the daily cost is about the same as two pints of beer in Dubai.
Term insurance policies are flexible, and can be cancelled at any time if they return to the UK.
It’s important the policy is written into trust
By writing a life insurance policy into trust, it means that the funds paid out from the policy, won’t be included in your estate.
If Barry & Jess chose not to write their policy into trust, the £800,000 life insurance payout would be added to their estate.
This means their IHT bill would increase from £800,000 to £1,120,000.
So whilst an £800,000 policy not written into trust, could offset some of the IHT bill. It doesn’t solve the problem entirely.
Writing a policy into trust is straightforward process. Most life companies offer a standard trust deed for use free of charge.
But you should take professional advice on the type of trust used (bare or discretionary). As well as the trustees and beneficiaries you appoint.
If you found this useful, you might like our free 13 Step Financial Checklist for British expats living overseas.
Or if you’re looking for professional help with your life insurance, pensions & investments – click here to book your free initial consultation.
