English inheritance tax

Insights into what is involved in buying, selling & living in Portugal

UK inheritance tax (IHT) is a worrying matter for more and more Britons as they fall liable to this damaging tax. You don’t have to be a UK resident to be a victim. Expatriates living in Portugal may also be subject to IHT, although many may not realise this.

The thought of having to pay 40% tax on the value of your wealth over the UK tax-free allowance of £300,000 can be distressing, and even more so for unenlightened beneficiaries suddenly landed with a huge tax bill which they may struggle to pay.

Do it legitimately

There are legitimate ways to defeat IHT and I have listed some of them as follows:

Domicile – UK domicile persons are liable to IHT on their worldwide assets and UK non-domiciled persons are liable on all assets located in the UK. To avoid IHT altogether you need to become UK non-domicile for a minimum of three years and completely dispose of all assets in the UK, or at least reduce the total value of your UK based assets to under the tax-free allowance. Shaking off domicile is not easy and there are various criteria to be met to achieve this status.

Lifetime gifts – You may give away unlimited amounts during your lifetime and providing you live for seven years after the date of the gift, the value of the gift and any increase in its value over the seven year period will not be subject to IHT. The gift must be absolute in that you must not under any circumstances continue to benefit from the gift otherwise it can be subject to the Pre-owned Assets Tax (POAT) which was introduced to stop people gifting and then benefiting from the asset. POAT is a new tax and applies to benefits enjoyed after April 6th 2005 to gifts made after March 17th 1986.

If a person dies within seven years of making a lifetime gift the rate at which tax is payable is reduced on a sliding scale after three years following the date of the gift and reduces to nil at the end of seven years. It applies only to the value at the time of the gift so that any subsequent appreciation will not be part of your estate.

Annual gifts – Make use of the annual gift tax exemption by giving away up to £3,000 a tax year to anyone of your choice or into a trust. The £3,000 tax-free exemption can be carried forward from the previous tax year but not further. Smaller amounts of up to £250 can also be given away per financial year tax free to any one person.

Wedding gifts – Parents can give away £5,000 to a child on marriage. Grandparents and remoter relatives can gift £2,500 each and anyone else £1,000. There are strict rules on how the gifts are made and professional advice should be taken.

Interspousal transfers – Transfers between spouses and between legal civil partners are IHT exempt. In only one situation the rule differs and that is when the deceased spouse is a UK domicile and the surviving spouse a non-UK domicile, then there is an additional one off allowance of £55,000.

Equalisation – You can mitigate IHT further by married couples equalising their estate between each other so that each spouse can benefit from the nil-rate band. By doing this £114,000 can be saved in IHT. If married couples leave their individual estates to each other no advantage is gained by the nil-rate band when the surviving spouse dies.

Normal income gifts – Gifts can be made tax-free out of normal income providing that it does not reduce your normal standard of living i.e. you can liv

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