I still call (the United Kingdom) home – UK inheritance tax in Australia
Recently we assisted clients who, although on the surface were Australian, had a past in the UK.
Their story was not unusual. Born in Australia, Australian citizens, moved to the UK after university to enjoy London and travel through Europe, 8 years later they returned back to Australia and then 12 years after that they decided it was time to sort their estate planning.
The alarm bells started to ring as they explained their continued asset holding back in the UK.
- The first ring: who will get the assets upon death (there was no UK will)?
- The second much louder ring: what assets will be left after UK inheritance tax?
- The final gong: can their Australian assets be clawed into the UK inheritance tax regime?
United Kingdom considerations
The UK has a unified estate and gift tax called inheritance tax (IHT). Key elements of IHT are:
- it applies to the value of your estate (your property, money and possessions) at the time of your death;
- it is charged on your estate at the rate of 40%;
- if you reside in the UK and are domiciled in the UK, IHT applies to your worldwide assets;
- if you reside outside of the UK, however, you are domiciled in the UK, IHT applies to your worldwide assets; and
- if you reside outside of the UK and you are not domiciled in the UK, IHT applies to your UK assets only.
Even if you are not domiciled in the UK, you are deemed to be domiciled in the UK for IHT purposes if you:
a. reside in the UK for 17 out of 20 years prior to your death; or
b. you die within three years of ceasing to be domiciled in the UK.
Fortunately for our client, they would not be deemed domiciled in the UK. This would mean IHT would apply only to their UK assets and not their worldwide assets.
- evaluate your asset holdings based on their location and the death tax system (if any) of that location; and
- write not only a will in Australia, but also write a will that deals exclusively with assets held in that location.
It is possible to have more than one will however, it is important that each will is drafted in accordance with the laws of the country where it is to apply and that multiple wills do not cancel each other out.