Keeping it in the Family: Inheritance tax mitigation for non-UK domiciled individuals

Keeping it in the Family: Inheritance tax mitigation for non-UK domiciled individuals Alex Robertson April 24, 2024

For non-UK domiciled individuals (non-doms) with significant assets, inheritance tax (IHT) planning becomes a crucial aspect of wealth preservation. Inheritance tax has always been a hot topic politically, so keep an eye out for proposals to change IHT in an election year.

Right now, the UK has an IHT rate of 40% on estates exceeding the nil rate band (currently £325,000). However, non-doms enjoy certain advantages when it comes to IHT. There are key strategies for non-doms to minimise their IHT burden and ensure their wealth passes smoothly to future generations.

Understanding Non-Dom Status:

Your domicile status determines your IHT liability. Being “domiciled” in the UK means it’s considered your permanent home for tax purposes. Non-doms generally pay IHT only on UK-based assets. This offers a significant advantage compared to UK-domiciled individuals, who are taxed on their worldwide estate.

There is, of course, a catch. You can lose your non-dom status and become “deemed domiciled” for IHT purposes if you spend too much time in the UK. The current threshold is 15 out of 20 tax years. We’ve got lots of experience on international tax alk to us about your residency status to avoid this pitfall.

Strategies for IHT mitigation:

  • Gifting: Making regular gifts out of your estate can significantly reduce its value, minimising your IHT liability. However, there are complex rules regarding gifts, so seek advice to ensure you comply with IHT regulations.
  • Offshore Structures: Non-doms can utilise offshore trusts and companies to hold their assets outside the UK. This can effectively shield those assets from UK IHT. Remember, complex legal and tax implications surround offshore structures…
  • Life Assurance: Taking out a life assurance policy with a beneficiary outside your estate can provide a tax-efficient way to transfer wealth. The payout from the policy wouldn’t be subject to IHT, providing your loved ones with a financial cushion.
  • Utilising the Nil Rate Band: Even non-doms can take advantage of the UK’s nil rate band. Gifting assets up to this threshold to your spouse or a civil partner can be IHT-free.
  • Investing in business assets: Assets held in a qualifying non-UK trading business can be exempt from IHT, subject to certain conditions. Consider structuring your business investments strategically to benefit from this exemption.

Effective IHT mitigation requires a long-term perspective. Talk to us about your IHT strategy, especially as your circumstances and assets change. Factors like marriage, children, and changes in domicile status can all impact your IHT liability.

The government is constantly reviewing and potentially revising inheritance tax rules. Stay informed about any changes that might impact your IHT situation. On top of that, some countries have double taxation treaties with the UK that can affect how your assets are taxed for IHT purposes. Again, we can chat about any applicable treaties to understand their implications.

Perhaps even more important is that you chat to your family. Open communication with your beneficiaries about your IHT plans is crucial. This ensures a smooth transition of wealth and avoids any misunderstandings down the line.

Give us a call and we can get the ball rolling.