Death and taxes – both regrettable, but both worth thinking about
A lack of planning may be one issue. The idyllic places that many visit on holiday are likely be somewhat different when the rose-tinted sun glasses are removed and a slightly harsher reality may start to cut in. There is also a surprising level of ignorance about tax liabilities in the UK that at some stage will be inevitable.
Thousands of Brits that are enjoying the lifestyle and high performing economies in Arab Gulf states such Dubai are probably relishing their no tax environment. And so they should – they have probably earned it thoroughly – but at some stage there will be payback time.
There is a widespread misconception, and perhaps a slightly surprising one given that many expats are High Net Worth individuals that their current status of ‘non-resident for tax purposes’ makes them exempt from all UK taxes. Unfortunately that is not the case – we are talking about the tax man here.
However, being non-resident only applies to the time you spend away from the UK and the exemption you have from certain taxes – most significantly income tax for the period you may be working aboard and deemed as non-resident.
So far so good, but no matter where you are in the world and where your estate and assets may be located, HMRC has the right to tax you. You can run, but you cannot hide. British expats never lose their domicile status even if they have lived overseas for decades – the tax man has missed them and very loyally has not forgotten them.
The good news is that HMRC does not need to get it all its own way, and as with most areas of our lives planning pays dividends.
A recent survey conducted by Close Brothers Asset Management showed a very surprising degree of ignorance as to basic tax planning and inheritance tax issues When asked what they knew about the current threshold for UK inheritance tax (IHT) 14% thought it was £500,000 or higher. It has been frozen at £325,000 for years and any value over this figure will mean your estate will be taxed at 40%, but there are slightly different rules for married couples. A good financial adviser should be able to provide sample projections on what an estate could be worth in 10 or twenty years time based on a range of growth projections and then planning inheritance can be simplified because you understand the assets involved.
We might appear to be a bit harsh on the UK tax authorities. But we are not picking on them. Any British expat owning a property in another country could find that location could make a taxable charge on your estate alongside HMRC.
New legislation is planned for the EU in Summer 2015 that will apply rules to whenever a EU citizen dies leaving property in a different EU country.
The UK has opted out for the moment due to the fundamental differences in the civil code and common law code in mainland Europe. The estates of UK based individuals could still be affected by these changes but you have the optionto have your will to be drawn up correctly stipulating this. As ever planning is key.
Once you understand your current and possible future assets, it is absolutely essential that you have a thorough understanding of the seven year gift rule.
And the third issue is to ensure you are thoroughly briefed on the seven year gift rule.
The gift doesn’t have to last seven years, you do.
It’s a great way to plan ahead in order to protect your wealth for the benefit of loved ones, families even your friends. Substantial gifts can be made in this way, you can even use it to pass on property but there are very strict rules on this. You can’t give your house away and continue to benefit from living there – HMRC is already ahead of you on this and similar other benefits and there are detailed guidelines on what constitutes a proper gift.
Provided you survive the subsequent seven years and the manner of giving complies fully with the rules, there will be no taxable charge made on the value. Interestingly the report shows that 18% of the most affluent respondents taking part in the survey were completely unaware of this legitimate exemption.
Think about, plan it and get on with your life