When someone passes away, their estate (which includes their money, property, and other assets) may be subject to inheritance tax in the UK. For people who are non-UK domiciled citizens (those who don’t permanently live in the UK or consider it their home), inheritance tax rules can be different and sometimes complicated. Let’s break it down.
What Is Inheritance Tax?
Inheritance tax (IHT) is a tax charged on the value of someone’s estate after they pass away. In the UK:
The tax-free allowance (also called the “nil-rate band”) is £325,000.
Anything above this amount is usually taxed at 40%.
For example, if an estate is worth £500,000, inheritance tax is calculated on the amount over £325,000:
£500,000 - £325,000 = £175,000
Tax = 40% of £175,000 = £70,000
Who Pays Inheritance Tax?
Usually, the executor or administrator of the estate (the person managing the deceased’s assets) pays the inheritance tax. The money comes from the estate itself before anything is passed on to the heirs or beneficiaries.
How Does Domicile Affect Inheritance Tax?
Your domicile plays a big role in determining how much inheritance tax is owed in the UK.
UK Domiciled Individuals:
If you are domiciled in the UK, inheritance tax applies to all your worldwide assets (both in the UK and abroad).
Non-UK Domiciled Individuals:
If you are not domiciled in the UK, inheritance tax usually applies only to your UK assets (like property or bank accounts in the UK).
What Is Deemed Domicile?
Even if you are not technically domiciled in the UK, you might be treated as deemed domiciled for tax purposes if:
You have lived in the UK for at least 15 of the last 20 years, or
You were domiciled in the UK at any point in the past and returned within the last three years before
your death.
If you are deemed domiciled, the UK will tax your worldwide assets, just like a UK-domiciled person.
What About Spouses and Inheritance Tax?
If you leave your estate to your spouse or civil partner, the inheritance tax rules depend on their domicile:
Both Spouses Domiciled in the UK:
No inheritance tax is due when assets are passed between spouses.
One Spouse Is Non-Domiciled:
The tax-free transfer limit is capped at £325,000, unless the non-domiciled spouse elects to be treated as UK domiciled for inheritance tax purposes.
What Is Probate?
Probate is the legal process of managing and distributing someone’s estate after they pass away. It involves:
Applying for a Grant of Probate (if there’s a will) or a Grant of Letters of Administration (if there’s no will).
Paying any inheritance tax owed.
Distributing the estate to beneficiaries.
For non-UK domiciled individuals, probate might be required if they have UK assets. This ensures the correct taxes are paid and the assets are legally transferred.
How to Reduce Inheritance Tax
Here are some ways non-UK domiciled individuals can reduce inheritance tax:
Gifting Assets:
Giving away assets during your lifetime can reduce the value of your estate. If you survive for 7 years after gifting, the assets are usually not counted for inheritance tax.
Using Exemptions:
Small gifts of up to £3,000 per year are exempt from inheritance tax.
Setting Up Trusts:
Placing assets in a trust can help reduce inheritance tax, though the rules can be complex.
Life Insurance:
Taking out a life insurance policy to cover the inheritance tax bill can prevent your heirs from having to sell assets to pay the tax.
Why Is This Important for Non-UK Domiciled Citizens?
Non-UK domiciled citizens often have assets in multiple countries. Understanding how UK inheritance tax and probate apply to their UK-based assets is crucial to:
Avoid unexpected tax bills.
Ensure their estate is distributed according to their wishes.
Protect their family from legal and financial complications.
How Canko Law Firm Can Help
At Canko Law Firm, we specialize in helping non-UK domiciled individuals with:
Inheritance Tax Advice: Understanding how the rules apply to your UK assets.
Probate Assistance: Navigating the legal process of managing UK assets after death.
Cross-Border Expertise: Handling estates with assets in multiple countries, particularly between the UK and Turkey.
Estate Planning: Reducing inheritance tax through careful planning and trusts.
Contact Us
If you are a non-UK domiciled individual and need help understanding UK inheritance tax or probate, contact Canko Law Firm today. We can guide you through the process and provide personalized advice to protect your estate and ensure your family’s peace of mind.
