Limits of Inheritance Tax Charge

Inheritance tax has a different basis to other  taxes.   A UK “domiciled” individual is liable to inheritance tax on all his worldwide assets. Individuals who are not domiciled in the UK are liable to inheritance tax on assets situated in the UK.

Domicile is a legal concept that refers to an individual’s long term base or home. A person who was not born in the UK and who is living in UK for a temporary period (even several years) , is not likely to have UK domicile. In fact, domicile in the UK can be one of three domiciles, England and Wales, Scotland and Northern Ireland. However UK inheritance tax is uniform in the three jurisdictions.

A person generally acquires the domicile of his parents. In order to loose an initial domicile, it is necessary to “put down roots” in another country; effectively have a long term intention to make the country one’s permanent home in substitution for, say, the country of birth . Domicile is often disputed by the Revenue Authorities.

A non-UK domiciled individual is only liable to inheritance tax on UK situated property.   Therefore an Irish domiciled resident individual or even an Irish UK resident Irish domiciled individual will only be liable to inheritance tax on property and assets in the United Kingdom.

There are additional test of domicile which are in addition to the common law rules mentioned above. UK Inheritance tax  deems an individual to be domiciled in the UK at the time of a transfer  if he was domiciled within the three years preceding the transfer. Also individuals resident in the UK for income tax not less than 17 of the 20 years  ending with the year of the death or transfer are deemed to be domiciled in the UK.

A non- UK grant of representation  can be-sealed by the English Courts thereby having it recognised in the UK.  Alternatively, a separate will dealing with their England and Wales or UK property, may be admitted to probate.

Where an individual holds assets in the United Kingdom it is essential that consideration should be given to mitigating UK Inheritance Tax.   UK Inheritance Tax is notoriously onerous.  In the case of non-domiciled individuals (generally most Irish individuals) English Inheritance Tax will only apply to their property situate in Ireland.   This will include land but could also include assets deemed to be situate in Ireland such as shares in an English registered company.

An Irish individual who may also be subject to Irish Inheritance Tax and there will generally be double taxation  to the extent that the same asset is taxed in each jurisdiction.  However because English Inheritance Tax is generally more onerous the higher UK tax may be payable albeit credit for the Irish Inheritance Tax on the same inheritance.

As in Ireland there are generally three taxes to be considered when lifetime gifts or transfers are being made namely Capital Gains Tax, Stamp Duty and Gift Tax.  In the United Kingdom there is no Stamp Duty Land Tax or Stamp Duty on lifetime gifts.

As in Ireland Capital Gains Tax can arise but under certain circumstances it would be deferred in the case of certain gifts.  However an individual who is neither resident or ordinarily resident in the United Kingdom will be exempt from UK Capital Gains Tax in many cases. This exemption is no longer available for residential property.

Strikingly and in contrast to Gift Tax which exists in most countries including Ireland there is no tax whatsoever if an individual makes an absolute gift and survives by seven years.  The only tax on lifetime gifts for non-resident individuals is Inheritance Tax which can arise where a person dies within seven years of making the gift.   It would make that the only UK tax in these cases.   An Irish resident may of course have Irish Capital Gains Tax and Gift Tax to consider.

In the case of inheritances on death under Irish law there are no Capital Gains Tax.  There is no stamp duty and in effect there is no Capital Gains Tax in fact as in the United Kingdom assets are deemed to be re-acquired at the date of death so that they are re-based and any Capital Gains Tax that would have arisen immediately before the sale is eliminated.  The successors are deemed to inherit at the market value as of the date of death.    Certain Government stock and other property is exempt from Inheritance Tax even if situate in the UK if owned by an individual who is neither domiciled there or ordinarily resident.

Therefore English Inheritance Tax is a matter which arises only on deaths or gifts but within seven years of death.

The rate of English tax is double the rate of Irish tax and it applies to whole estate.  The rate is nil on the first £300,000.00 and 40% on the balance.   The nil rate band can now be transferred between spouses so that potentially up to £600,000.00 is available.

Where the tax arises on lifetime transfers i.e. where the person dies within seven years the nil bands are the same but the rate of tax is 20%.  Furthermore the actual tax is reduced further by so called tapering relief where the death is between three and seven years so when the death takes place between three and seven years after the gift the tax is reduced by between 20% and 80% of the above amount.

The property passing to spouse is exempt from Inheritance Tax.  However there is a limit of only £55,000.00 on the exempt amount if the recipient is non-UK domiciled so where the owner is UK domiciled and the recipient is no-UK domiciled gifts to charity are exempt.  Gifts not exceeding £250.00 to any one person in any one year are exempt.  Transfers of £3,000.00 per annum are exempt and this unused exemption can be carried forward one year.


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