The new Conservative/Liberal Democrat coalition has introduced some sweeping tax changes, but conspicuous by its absence was the Tories’ proposed increase in the Inheritance Tax threshold from £325,000 to £1 million. Yet, anyone worrying about Inheritance Tax should be aware that it is a tax that can be avoided with correct planning even if you still live in the UK. If you are an expat, you can avoid taxes on your pension through a QROPS pension transfer
In the UK, the first £325,000 of an estate (also known as the “nil rate band”) is free from IHT. Furthermore, recent rule changes means that passing an estate to a spouse is now completely free of IHT and both tax-free allowances can be used on the surviving spouse’s death. Therefore, if you are married to a UK national, only estates in excess of £650,000 are likely to incur IHT. If you are married to a non-UK national, for example, you have a Thai wife and you live in Thailand, the spouse’s tax free allowance is only £55,000. She would only be deemed domiciled in the UK and receive the full allowance if she were domiciled in the UK for the three years immediately prior to the transfer. If she had been living in the UK and wanted to retire in Thailand, she probably also wouldn’t be applicable for the full allowance.
However, with some advanced planning, estates well above this amount need not pay any IHT at all.
● The first and perhaps easiest step in avoiding IHT is to write a will. A will is perhaps the easiest way to avoid IHT problems on death. The laws of intestacy are clumsy when it comes to IHT. You will also make life considerably easier for your descendants. You don’t want a lengthy probate battle after your death;
● Take out a Whole of Life assurance policy written under trust. Such a policy will pay a lump sum on death, but because it is written under trust that lump sum is not considered part of the estate. Hence, the premiums paid are effectively a transfer of assets from within the estate to outside the estate, and no IHT is due;
● Set up pension arrangements under ‘Spousal Bypass Trusts’. A spousal bypass trust also avoids IHT being payable on the assets within your pension. On death, instead of transferring to your spouse, the pension is transferred into a trust for the benefit of, say, your children. The surviving spouse does not have access to the assets directly but can borrow from the trust, with the loan being written off on his or her death. Not only does the pension fall outside of the estate, but the loan reduces the value of the estate of the surviving spouse, thereby reducing his/her IHT bill as well;
● Gifts of up to £3,000 can be made per recipient per year without any IHT implications;
● Yet regular payments out of income without a reduction in your standard of living are also exempt for IHT purposes;
● And importantly, one-off gifts can be made in excess of £3,000 and while there is a seven year survival period in order to avoid IHT, the IHT liability tapers down from year three. Furthermore, the recipient is entitled to take out a life assurance policy that matches the potential IHT exposure. The premiums on such a policy will inevitably be lower than the IHT payable, so the seven year survival period really should not be a major consideration.
For UK expats living in France, Spain, Thailand, etc., they can protect their pension from inheritance tax through a QROPS pension transfer. If you have any commercial property, you can also include this in your QROPS.
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