Avoid the pitfalls of inheritance tax; Your Money - tax specialist Mike Fleming looks at inheritance tax.
WITH many more people balancing heavy workloads and busy lifestyles, it''s easy to put managing your estate to the bottom of your to-do list.
We are, of course, talking about making a will and in so doing must contemplate that final tap on the shoulder which comes to us all - not a pleasant thought!
Setting aside the unpleasantness of the situation for which you are planning, it is vital that we all ensure that our families won''t be left with unexpected and hefty tax bills when we shuffle off this mortal coil. It is even more important if you or your spouse is classed as having a non-UK domicile and especially so as the laws relating to income tax and capital gains tax for non-domiciled individuals has changed dramatically in recent years.
The basic tenant of inheritance tax planning is that anything that is left to a surviving spouse, regardless of its nature or value, will be totally exempt from inheritance tax. There is, however, a notable exception to this ruling and this is where the surviving spouse is regarded as being not domiciled in the UK for IHT purposes. If the surviving spouse is regarded as a non-dom then limit falls from total exemption on whatever is received from the deceased''s spouse to the sum of PS55,000 with the excess falling to be charged at the inheritance tax rate which currently stands at 40%.
Many UK residents and domiciled individuals who are married to foreign nationals may be unaware as to the family''s potential exposure to inheritance tax in the event of their death. Most people assume that all married couples get the spousal exemption, but as you can see such assumptions could prove to be very costly for the survivors.
There are essentially three types of domicile this being Domicile of Origin, Domicile of Dependence and Domicile of Choice. Each type of domicile has its own complex rules but essentially you can only be domiciled in one country at any one time, this is unlike residence which allows you to be resident in more than one country at the same time.
Importantly for IHT purposes there is a concept called Deemed Domicil' ' which deems an individual to be domiciled in the UK if they have been resident in the UK 17 of the previous 20 years.
The whole concept of residence and domicile is often confused and open to mis-interpretation. In response to this the Government has included clauses in the 2013 Finance Bill to enable a surviving non-domiciled spouse to elect to be regarded as domiciled in the UK provided the election is made within 2 years from the date of death of the first spouse.
The election, however, does not extend to cover the full amount of the deceased''s estate but merely lifts the current exempt level of PS55,000 to PS325,000, the amount of the current NIL rate band. The possibility of making such an election will be good news for many whose inherited assets fall between PS55,000 and PS325,000, but in the event that the deceased''s estate is substantially more than this the surviving non-domicile spouse will still be exposed to a very unexpected tax bill.
A person''s residence and their domicile are two entirely separate and distinct concepts and must be viewed as such when arranging your finances. Domicile is a complex issue and failing to recognise and formulate a strategy to address resultant exposures will be heavily punished by HMRC. There are actions which can be taken to minimise the exposure and in some cases reduce the exposure to NIL, but like everything else such actions need to be taken as part of the 360 degree tax strategy addressing all of the other areas likely to be affected.
If you have any doubt about your own or your spouse''s domicile, seek professional advice.
? Mike Fleming is a tax director at Straughans Chartered Accountants, www.straughans.co.uk
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|Publication:||The Journal (Newcastle, England)|
|Date:||Apr 27, 2013|
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