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Nothing is certain except death and taxes, wrote Benjamin Franklin in 1789. Some claim the great man pinched the line from Daniel Defoe who said something very similar in a book written 60 years earlier.
But whoever came up with it, there is no disputing the accuracy of the maxim. It is just as true today as it was in the eighteenth century, but nowadays the tax authorities will try to take a slice from your estate even after you have died.
If you are a British citizen, don’t be lulled into a false sense of security by your residency in Cyprus. It is a common misconception among British expats that their liability to UK tax ends as soon as they become a tax resident elsewhere. Unfortunately, that is rarely the case – the estate often remains liable to UK inheritance tax (IHT).
The UK tax authority (HMRC) categorises individuals by residency and domicile. Confusion over these terms creates false security. People assume, not unreasonably, that they mean the same thing. Not to the taxman, they don’t.
Unless you actively change it, your domicile is the country where you were born. Residency is the country where you spend most of your time.
It is easy to become tax resident in another country, and therefore to become a UK non-resident. But it is extremely difficult to lose your UK domicile. If an expat has any ties with the UK (no matter how tenuous – emotional or financial), it will normally be enough for HMRC to argue that they remain UK-domiciled for tax purposes.
So, although you are classed as non-resident in the UK for tax purposes, your family will still be liable for UK inheritance tax of 40% on the value of your estate that exceeds the HMRC threshold.
The threshold stands at £325,000 (a little more if the estate includes your home) or £650,000 for married couples and civil partners. So, unless steps are taken, the beneficiaries of an unmarried expat’s estate worth STG£3 million will be faced with a British tax bill of around STG£1 million.
However, with careful planning, and independent advice, it is possible to legally avoid a significant amount of UK inheritance tax.
One way is to change your country of domicile, but this is not easy. It involves much more than simply showing that you now live abroad. You also have to show that you have no intention of returning to the UK. This will mean, at very least, relinquishing your UK passport, closing all UK bank accounts, selling any property owned in Britain and buying property in Cyprus.
Even if you do all this, the taxman may decide against you. There are, however, a number of tax efficient financial structures by which you can not only avoid inheritance tax but also increase the final value of your estate.
A discounted gift trust is a way of effectively ‘gifting’ money to a beneficiary while retaining control of the money until death. Transferring your pension pot can also help you avoid inheritance tax or, at least, reduce the bill.
The processes are worthwhile but complex. You should always seek advice from an independent financial adviser who will be able to talk you through your options.
The Woodbrook Group is an international firm of financial advisers. We are not owned by any financial institution or life insurance company and can offer you unbiased and impartial advice.
Our approach to comprehensive financial planning and investment consultancy services for high-net-worth individuals helps ensure our clients’ wealth is preserved, protected, and maximized tax-efficiently. We can help you and your family prepare financially for the experiences and challenges of life.
And that also means preparing for what happens after a death. Nobody likes to think about it, but it does need to be planned for.
