Approximately 1.3 million Britons now live in Australia. Many choose to retain UK properties but are not fully aware of the UK tax, and in particular the inheritance tax (IHT), implications. With information sharing between tax authorities now the norm, it is no longer possible to ignore this.
Your domicile status will determine your liability to IHT, as the UK imposes IHT at 40% on the value of your estate above your available nil rate band (currently £325,000, but with the potential to transfer this to your spouse if unused to have a combined £650,000 and an additional £100,000 each for a new main residence nil rate band), according to domicile rather than residence. Transfers between spouses are exempt provided that they have the same domicile status. However, transfers to a non UK domiciled spouse (for example, to an Australian spouse), from a UK domiciled spouse are only exempt up to £325,000.
If you consider Australia to be your permanent or indefinite home, you may have acquired an Australian domicile of choice, although it will depend upon the facts. The difference is that if you still have a UK domicile of origin you will potentially be liable to IHT on your worldwide estate and anything you transfer into an Australian trust can be caught too (with a 20% IHT entry charge, ten year anniversary and exit charges). However, if you have acquired an Australian domicile of choice, you will only be liable to IHT on your UK estate and anything you transfer into a UK trust.
From 6 April 2017, the UK is proposing significant changes to IHT which may affect Britons living in Australia since:
- non-UK domiciled individuals will no longer be able to shelter UK residential property from IHT by holding through an offshore entity such as an Australian trust. Ten year and exit charges will apply. Loans and collateral linked to UK residential property are also likely to lose their IHT excluded property status; and
- individuals with a UK domicile of origin will be unable to take advantage of a subsequently acquired domicile of choice at any time they are UK resident. After a one year grace period, any Australian trusts will become subject to ten year and exit charges and if the trust is settlor interested (which most Australian trusts are), income and gains arising will be taxable on the deemed settlor.
What to do about IHT?
If you have an IHT exposure, you should seek professional advice. Common strategies include:
- preparing a domicile declaration as evidence of your Australian domicile of choice, although HMRC will still consider the facts, as domicile is a complex area of law;
- IHT effective lifetime giving - each individual is able to make:
- £3,000 worth of gifts per year plus £250 to any number of individuals;
- regular gifts out of income (which varies according to your circumstances);
- potentially exempt transfers (i.e. absolute gifts), which are exempt if you survive for seven years (with tapered rates applying if the gift was made more than three years but within seven years preceding death);
- encumbering property liable to IHT with debt, as IHT is due on the net value of your estate, but complex rules apply to this now;
- making gifts to UK charities in your Will (which are IHT exempt); and
- considering if any properties qualify for Business Property Relief or Agriculture Property Relief.
What else to do?
This article focusses on IHT, but you should also seek advice on:
This article was co-written by David Shaw CEO of WSC Group and James Whiley, Special Counsel at Hall & Wilcox.
*The advice published on social media mediums by WSC Group is of a general nature and does not constitute specific financial advice. For a detailed financial strategy you should consult with a qualified financial advisor before making any investment decision.
- what happens to your UK properties on your death or incapacity? You must consider whether to have Wills and the equivalent of enduring powers of attorney (which deal with financial decisions if you lose your mental capacity), in both countries, as succession to real estate is determined by the laws of the country in which it is situated. Although it is possible to have your grant of probate resealed in the UK, this makes the administration of your estate more complicated and lengthy. As Australia does not have IHT, it is usually preferable to have Wills in both countries (which must be carefully drafted to ensure that one does not accidentally revoke the other), since it is possible to be more flexible with your Australian estate planning (for example by including asset protective and tax effective testamentary trusts in your Australian Will);
- UK capital gains tax (CGT), since after 6 April 2015 CGT is charged on non-UK residents disposing of UK residential property. This was not the case before April 2015, so a pro-rata adjustment and valuations from April 2015 will be required on any sale. Changes to UK Principal Private Residence Relief were also made from 6 April 2014;
- whether the Annual Tax on Enveloped Dwellings applies where you own
UK residential properties via a "non-natural person" such as an Australian trust; and
- the significant income tax changes relating to investment properties which make it less attractive for buy to let investors.
Disclaimer: while due care is taken, the viewpoints expressed by contributors/sponsors do not necessarily reflect the opinions of Your Investment Property.
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