Can Expats Escape Inheritance Tax by Moving Abroad?

Almost every single property development company and international estate agency, along with the PR firms that work for them have been guilty in the past of promoting various nations’ lack of inheritance tax as a reason for us Britons to buy a home in that nation and relocate there to avoid paying what is often dubbed, ‘the most unfair tax of all.’

However, everyone who has directly promoted another nation as a perfect escape from IHT for Brits is guilty of touting false information – because by simply moving abroad, Britons cannot necessarily escape their estate’s liability for inheritance tax upon their death.

Can expats escape inheritance tax by moving abroad?  No, they can’t necessarily – and in this article we’ll explain why that is the case, and we’ll also alert you to the ways in which expats can avoid paying IHT.

One’s liability to inheritance tax is dependent upon two factors; the first is your country of domicile, and the second is the value of your estate upon death.  You do not change your nation of domicile by moving abroad – you change your country of residence.  Your country of residence is important when talking about income and capital gains tax, it is not as important when talking about inheritance tax.  Your country of domicile is determined by where you were born and raised and can even relate to where you father was born – there is not a single legally defined explanation of what ‘domicile’ is when it comes to the British taxman, it is a concept that can be interpreted by them.  And you can bet your bottom dollar that when it comes to reaping inheritance tax, they will do all they can to ensure that you were determined to be of British domicile at the time of your death if your estate is valued over the IHT nil rate band.

If you move abroad, you do not lose your country of domicile – to do so requires significant effort and time.  You have to sever all ties with the UK including closing all bank accounts and disposing of property, you cannot regularly return to the UK, and if you still have British family and friends resident in the UK even this can potentially negate any argument you put forth for changing your country of domicile.  So, those who suggest that by moving abroad to a nation that does not charge its residents and domiciled citizens IHT you too can avoid British IHT are wrong at best, and purveyors of lies at worst.

The other consideration to keep in mind when it comes to IHT is the value of your estate.  You have what’s called a nil rate band, anything under this amount is not liable for IHT, but over the threshold and your surviving relatives could be hit for a bill of 40%!  At the moment the nil rate band for this tax year is £325,000 for individuals or £650,000 for couples.  Now whilst this may sound like a lot to many of us, the value of property in the UK has risen so significantly that many approaching retirement have accrued estates worth in excess of their nil rate band.  Whether these individuals move abroad or not, the British taxman can still come along and claim his 40% share upon your death.

So, how can expats avoid IHT?  Well, the very first thing they need to do is speak to a specialist adviser and get qualified and professional help.  Not only is IHT unfair, it is very complex indeed – but the good news is there are legitimate ways you can protect your heirs’ inheritance from inheritance tax.  Some of the ways include the use of trusts for life assurance policy payouts for example, the use of lifetime gifts, wedding gifts, small gifts and regular gifts to give away your wealth to your heirs during your lifetime, and perhaps even using a SIPP for the accrual of your pension pot.  However, the latter may not be the best solution for those moving abroad in retirement.

There are legitimate and advantageous ways to settle your affairs in anticipation of your death so that a) you no longer have to worry about such morbid matters, b) your heirs are protected, c) your estate’s value is not eroded, d) your estate remains intact and e) the taxman cannot get his sticky fingers on anything you worked your whole life to gain.  Don’t leave these matters to the last minute however, because the sooner you start making provision for the protection of your estate the better.  Speak to an adviser to find the right course of action for you.