23 Jul 2021
Could UK Inheritance Tax affect your estate?
Published by Clare Hesbrook and Jana Sosner
Death and Taxes are guaranteed in life and although death may be the same the world over, estate taxes vary widely across jurisdictions.
Australia abolished its inheritance tax regime in the late 1970’s (although there are certain capital gains tax implications for assets passing to your beneficiaries). Even superannuation can pass to some (but not all) beneficiaries tax free. However, just because you were living in Australia at your date of death, it does not necessarily mean that your estate is outside the reaches of foreign inheritance taxes.
One of the most ‘overbearing’ jurisdictions in this regard is the UK. Australia is home to a large number of UK expats and many Australians have lived in the UK at some point. From an inheritance tax perspective, it is important to note that the estate of any person who was born in the UK, lived in the UK (potentially even for a relatively short period) or holds assets in the UK can be caught by the UK’s inheritance tax system.
Unlike income tax, which is typically applied on the basis of a person’s residency, UK inheritance tax applies the much broader concept of domicile. So while someone with UK connections may be exempt from UK income tax whilst in Australia, their estate may still be subject to UK inheritance tax on their death, even though they no longer live there.
Subject to certain exemptions, UK inheritance tax is levied at a rate of 40% where the net estate exceeds the threshold amount of 325,000 GBP (for the 2021/22 tax year). Perhaps unsurprisingly, UK assets may be subject to inheritance tax, but what many people don’t understand is the impact of domicile. If a person dies with UK domicile, inheritance tax applies to their global assets, regardless of where those assets are located or where the deceased was living at the time of death. It is therefore extremely important for anyone with any connections to the UK, to understand their domicile and make arrangements during their lifetime to document, evidence, and if appropriate, change their domicile.
Failure to take the necessary steps during your lifetime, may leave executors with the very difficult (and expensive!) task of trying to prove your non-domicile status to the UK taxing authorities. There is no guarantee the executors would in fact be successful, potentially leaving your estate with costly tax and legal bills. This can be particularly hard on an ‘asset rich but cash poor’ estate, requiring the sale of assets to cover the UK tax liabilities, which may in itself may trigger capital gains tax here on a sale that could otherwise be deferred.
For any queries about UK inheritance tax or your estate planning needs, please contact Clare Hesbrook or Jana Sosner from Russell Kennedy Lawyers.
This information is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life).
PSK Financial Services Group Pty Ltd (ABN 24 134 987 205) are Authorised Representatives of Charter Financial Planning Ltd (AFSL 234666), Australian Financial services Licensee and Australian Credit Licensee. Information contained in this article is general in nature. It does not take into account your objectives, needs or financial situation. You need to consider your financial situation before making any decisions based on this information.