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Mark Kirkham, from Soteria Trusts Hong Kong, explains the importance of Inheritance Tax planning for UK expats, as well as anyone with assets in the United Kingdom.

In the 2021-22 financial year, taxpayers paid £700 million more Inheritance Tax (IHT) than in the previous year – £6.1 billion of IHT was collected, up 13% on 2020-21. This sudden increase was driven by rapidly increasing UK property prices and the recent freezing of IHT thresholds until 2026. It’s those two factors that have seen more and more estates caught in the IHT net, leaving families with some big decisions around whether they will need to sell the family home to pay the IHT bill.

IHT is levied against a deceased person’s estate at the rate of 40% on the value of the excess above the Nil Rate Band (NRB) threshold of £325,000 per individual or £650,000 per couple. There is also an additional Residential NRB of £175,000 if the main residential property is being given to a direct descendant of the deceased.

Property prices to blame. In February 2022, the average UK house price was £276,755, with London’s properties averaging £529,882. The UK has seen a 10.8% increase in property prices since February 2021, making it one of the highest growth periods in recent years. This means it’s more difficult for families to decrease their exposure unless they use certain tax planning strategies.

What else is taxable? There are still many UK investment property owners who are unaware of IHT, and others who think that it doesn’t apply to them. An estate that is subject to IHT, not only consists of the family home but also investment properties, as well as any stocks, non-property investments and cash. Subject to the domicile of the individual, IHT can extend to all foreign-owned assets such as businesses and property anywhere in the world.

Mistakes to avoid. Plenty of people make costly mistakes by not taking proper advice and trying to mitigate the tax burden themselves. One such mistake is using life insurance proceeds to pay the IHT bill. This is because the proceeds will also be subject to IHT unless the life insurance policy is written in Trust. Out of the 22,100 estates that paid IHT in 2018/19, over 6,000 of them paid IHT on proceeds of life insurance policies that the deceased owned.

IHT mitigation. One solution that Soteria Trusts recommend is a QNUPS (Qualifying Non-UK Pension Scheme). Assets within an overseas pension are exempted from IHT from day one, whereas other IHT solutions rely on the owner living a further seven years from any ownership changes.

There is no lengthy probate process for the deceased’s family to follow, and therefore they can access the funds in the QNUPS immediately. Although a QNUPS is a pension, it differs from traditional UK domestic pensions in the way that it can hold within it multiple asset classes, including investment property, cash, art, wine etc. The investments are also income tax and capital gains tax free.

It takes time to understand the intricacies of this IHT mitigation strategy. To start that process off, you can arrange an introductory call or meeting with us to discuss your individual needs, establish your current and future liabilities, and agree an action plan.

Soteria Trusts Hong Kong helps you manage, grow and protect your assets via a versatile range of trusts, international retirement solutions and tax advisory services.

Visit us at www.soteriatrusts.com or contact us via [email protected] to arrange next steps.

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