Inheritance tax and inheritance law in United Kingdom
Taxation Researcher | January 02, 2020
The Global Property Guide looks at inheritance from two angles: taxation, and what inheritance laws apply to foreigners leaving property in United Kingdom: what restrictions there are and whether making a will is advisable.
How high are inheritance taxes in United Kingdom ?
A UK-domiciled individual is liable to Inheritance Tax (IHT) on his worldwide properties which he gives (in the case of lifetime gifts) or leaves (in the case of inheritance) to his beneficiaries whereas, a non-UK-domiciled individual is liable to this tax only on his properties situated in the UK.
IHT is payable on transfers made by an individual when he dies or within seven years (lifetime transfers) before it. Lifetime transfers are cumulated (only those that were transferred within seven years before the transferor´s death), and the resulting taxable transfers up to the IHT threshold are tax-free. The threshold since 06 April 2009 is £325,000 (€433,333), and it will remain so until tax year 2018-2019. Transfers in excess of this threshold are taxed at 40%.
|TAX BASEE, £ (€)||TAX RATE|
|Up to 325,000 (€43,333)||0%|
|Over 325,000 (€433,333)||40%|
|Source: Global Property Guide|
Both UK-domiciled and non-UK-domiciled individuals may avail of certain exemptions and reliefs. Transfers exempted from inheritance tax are as follows:
- Gifts between UK-domiciled spouses
- Annual exemption of £3,000 (€4,000)
- Small gifts to any one person up to of £250 (€333)
- Gifts on marriage / civil partnership up to £5,000 (€6,667) from a parent, up to £2,500 (€3,333) from a grandparent, and up to of £1,000 (€1,333) from any other person
- Gifts to charities
Thanks to Squire, Sanders & Dempsey
What inheritance laws apply in United Kingdom ?
Moveable and immovable property in UK are governed by different inheritance laws
The inheritance of moveable property is governed by the law of the testator´s domicile at the date of his/her death. (In this context, domicile in very broad terms means the country or state where a person resides on a permanent or indefinite basis, although the concept, being one of private international law, has more complex angles not detailed here).
The inheritance of immovable property (which in the UK includes all interests in land, including mortgages) is governed by lex situs (the law applicable at the location of the property). Thus, for UK property rights, UK law applies even though the testator may have a foreign domicile.
UK law of intestacy applies to land and property
If a person dies without having made a will, his/her moveable property will be inherited by the persons entitled under the law of the deceased´s domicile at the time of death; however the succession to immovable property of an intestate is governed by the law of the country where the immovable property is situated. Accordingly, if a person with a foreign domicile dies without leaving a will, and he/she has UK land or other UK property in his estate, UK law of intestacy will apply to that land or property.
Where the deceased is survived by a spouse and children of the marriage, UK law of intestacy provides for the surviving spouse to receive the first £125,000 of the estate and a right to income for life for one half of the remaining estate. The other one half share of the remaining estate passes to the children. On the death of the spouse the children will then receive the fund which was held for the surviving spouse for life. If there are no children of the marriage then the surviving spouse receives the first £200,000 of the estate plus the income of one half of the remainder with certain other relatives receiving the other one half of the remainder absolutely. If there is no surviving spouse, but there are children, they will receive the whole estate absolutely in equal shares.
A person may make a will leaving his/her estate to any chosen beneficiaries
It is advisable for all persons, including foreign nationals, persons of foreign domicile, and those permanently resident outside the UK to execute a will dealing with property located in the UK.
The formalities relating to the drafting and execution of the will should comply with the requirements of UK law, so that the will is readily admitted to probate (this being the official document which gives full recognition to a will of a deceased person). If these requirements are not satisfied, it is necessary to demonstrate satisfactorily that the testator is a person of foreign domicile, and that the will is properly executed according to the law of the testator´s domicile.
The will of a person domiciled in the United Kingdom is valid if the testator has testamentary capacity i.e. is not a minor (under the age of 18) and is of sufficiently sound mind to have a proper understanding of the terms of the will when it is executed, and a genuine intention to have his/her estate devolve in accordance with its terms.
A will dealing with immovable property in the United Kingdom is valid if it conforms to the formalities of the laws of the testator´s domicile, or alternatively, the internal law in force in relation to the immovable property concerned. If a person´s will is valid and duly proved in the country of the testator´s domicile, it is admitted to probate in the United Kingdom. The moveable property of the deceased in the UK then passes under the terms of that will. In practical terms, the terms of a foreigner will govern who inherits UK property assets, but UK property law governs the property rights which may validly be created by such a will.
A person may make a will to leave immovable and movable property located in UK to any chosen beneficiaries. There is no "forced heirship" or "reserved portion; however, if a testator domiciled in the United Kingdom dies, leaving dependents who are not adequately provided for under the terms of the will, the dependents may apply to the court to claim reasonable provision for maintenance from the estate. Maintenance may be in the form of income payments for life, or alternatively a lump sum payable from the estate.
A UK will may be revoked
In the UK, a will may be revoked by destroying it so long as the testator has the intention to revoke it by doing so. Accidental destruction does not revoke the will and any available copy of a will accidentally destroyed can be admitted to probate.
A will is also revoked by the marriage of the testator subsequent to the date of the will, unless the will is specifically expressed to be made in contemplation of the marriage. However divorce does not have any consequence at all for a will made previously by either party to the marriage, so that their existing wills remain valid.
Property can be given away during the lifetime of the owner
UK property can be freely given away by the owner during his/her lifetime, and the gift will only be set aside (that is, declared void) if it was made to avoid the claims of creditors.
UK law includes "equitable ownership"
Under UK property law, a distinction is drawn between the legal holders of the title to land, i.e. those who are registered at the Land Registry as the owners, and the beneficial owners of the property who have what is described as "equitable ownership". The legal title holders may of course also be the beneficial owners, in which case there is no distinction between the two, but they may alternatively hold as trustee for others, in which event the rights of the beneficial owners will flow from the trust document: trusts cannot be registered at the Land Registry.
Marriage does not result in common ownership of property
On marriage, there is no automatic common ownership of UK land or property between the parties to the marriage unless they chose to put the property concerned into their joint names. In that event, the joint ownership may be one of two types, a "joint tenancy" by which the survivor of them will automatically inherit the one half share of the other, or alternatively a "tenancy in common" by which there is no automatic survivorship on the death of one party and instead each share in the property passes under the terms of the will of the deceased or in accordance with the rules of intestacy. These rules which relate to the legal title to the land apply equally to foreign married couples who own property in the UK, since they are enshrined in UK property law, but as mentioned above this does not prevent beneficial ownership from devolving some other manner under foreign law.
A trustee must be appointed to protect the property interests of minors
Persons under the age of 18 may not hold interests in UK land or property directly, but instead a trustee will hold the land for them until they attain the age of 18. The person giving the land to the child concerned may appoint anyone he chooses to be the trustee. Other persons who are incapacitated by reason of mental illness may hold property themselves but their affairs may be administered by a trustee under supervision by the Court of Protection.
UK land may be purchased through an "offshore" company.
Those domiciled outside the United Kingdom contemplating the purchase of land with substantial value in the United Kingdom are often advised to purchase the land through a company incorporated and controlled outside the United Kingdom. This substitutes the shares in the foreign company for the UK property in the estate of the owner of the company which may be beneficial both for UK inheritance tax purposes and also in terms of foreign law of succession to the shares in the company, which necessarily reflect the value of the land held within it. UK tax advice should be obtained prior to setting up any such structure.