Overview of UK IHT
Inheritance Tax is the tax that has to be paid by the estate of an individual who has died. Their ‘estate’ is defined as their tangible assets – essentially their money, possessions and property. The principle may seem straightforward, but there are lots of complicated rules that make the process complex. You can read some of the government guidance here. But even this guidance is just a very brief overview.
This article will first look at the basic rules of UK Inheritance Tax and then how they apply to Italian citizens living in the UK.
The essential Inheritance Tax (IHT) rules are as follows –
There’s usually no IHT to pay if either –
- the total value of the estate is less than £325,000
- the deceased leaves everything above £325,000 to their spouse, civil partner, a charity, or a community amateur sports club.
If the deceased leaves their home to their children (natural, adopted, foster or stepchildren), then the threshold usually increases to £500,000.
If the deceased is married or in a civil partnership, and the value of the estate is below the threshold or the deceased leave everything to exempt beneficiaries, the unused threshold will be added to their partner’s threshold. This can increase their threshold up to as much as £1 million.
The IHT rate is 40% – but only on the amount that exceeds the threshold. So – with a threshold of £325,000 and an estate valued at £425,000, the amount of tax due would be 40% of £100,000 – namely £40,000.
One exception is that, if a minimum of 10% of the estate is left to a charity, the Inheritance Tax rate on the remainder will be only 36%.
Remember, even if there is no IHT due from the deceased’s estate, the executor or administrator of the estate still needs to report the inheritance tax on the estate to HMRC.
Types of IHT
There are two types of IHT: Chargeable Lifetime Transfer (lifetime tax) and Death Tax
- Gifts given within 7 years of tax are usually subject to IHT and are called Chargeable Lifetime Transfers
- Gifts given on death are subject to Death Tax
The tax on chargeable life-time transfers depends on when the gift was given. Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Rates of Inheritance tax
|Years between gift and death||Rate of tax on the gift|
|Within 3 years||40%|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 or more years||0%|
How does Inheritance Tax work for overseas assets?
Remember that it is the estate that is subject to inheritance tax, not the beneficiary. So if an Italian domiciled person passes away (the testator) then Italian IHT is paid, regardless of where the beneficiary lives.
The usual rule is that if the testator is UK domiciled then the world-wide estate is taxed in the UK, regardless of where in the world assets are located. Therefore, determining a person’s domicile is key.
How is ‘domiciled’ defined?
An individual normally acquires a domicile of origin from his father when he is born. However, the individual can change his or her personal circumstances in such a way so as to lead HMRC to conclude that he or she is no longer domiciled in the UK.
For overseas people living in the UK there is a general rule in the UK that says that if the testator lived in the UK for 15 of the 20 years up to the date of death, the testator is treated as ‘Deamed Domiciled’.
These ‘deemed domicile’ rules do not always apply to Italian citizens
For Italian nationals living in the UK, the domicile rules are different. There is a separate UK – Italy arrangement for Italian citizens, which means these rules do not apply. Instead one needs to look at The Double taxation Relief (Estate Duty) (Italy) Order 1968. This says (paragraph 2) that domicile is determined by:
- Where the person had a home available at the time of death. If he had a home available in both Italy and the UK
- Where his personal and economic relations were closest. If this cant be determined
- Where the person had his habitual abode. If this cant be determined
- By mutual agreement between the contracting parties.
Tax advice for Italian citizens living in the UK
If you are an Italian citizen living in the UK and are considering inheritance issues, AccountsCo offers a full array of supporting services. To find out more, please get in touch. Remember, early planning is essential for IHT.
Overview of UK IHT Inheritance Tax is the tax that has to be paid by the estate of an individual who has died. Their ‘estate’ is defined as their tangible assets – essentially their money, possessions and property. The principle may seem straightforward, but there are lots of complicated rules that make the process complex. […]