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How British Expats Are Now Risking Paying UK Inheritance Tax!
Monday, 11 May, 2020
How Much would your family be able to pay?
introduction
We met Andrew Foster back in 2009 after a client sent him to us as a referral. The first thing that we did was to help him to plan for inheritance tax.
And we’ve been working with him ever since then.
Over that time we’ve implemented several different projects.
Here’s his assessment of his situation at the time we first met.
Andrew Foster
how things started out!
“When I first met Advisers Worldwide I was aware that I might have an issue with Inheritance Tax in the UK.
Though I didn’t appreciate the scale of it or the impact that it could have on my family.
At the time I was only interested in getting my investments sorted out.
I wasn’t happy with what I had and I was keen to get them working properly for me.
I also remember being resistant to the idea of life insurance.
I’d taken out a policy with my wife’s brother which was costing me a fair bit. So’ I had no inclination to make changes which were only going to cause strife with the inlaws.
So it was a nonstarter!
They brought up the issue with me right from the start.
Though I quickly shut it down and said I wanted to focus on investment.
In the end they must have got enough information out of me to get an idea about the size of the problem.
What's the impact of IHT on your family?
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The Scale of the UK Inheritance Tax Problem becomes clear!
I hadn’t realised how much my situation had changed.
Growth in the London property market meant I had to deal with it.
I couldn’t ignore the fact that if anything happened to me my family would have a big Inheritance tax bill to pay.
Not only that, the assets in my estate would be stuck until this bill got paid.
How exactly my wife was going to do this was the real worry!
Virtually all the assets were in my name which only made things worse.
It also meant that she was going to struggle financially until she could find a way to pay the taxman.
If anything happened to me, I wanted things to be a smooth as possible for Mae Lee and the boys.
Advisers Worldwide worked with me.
They helped me understand how much this liability would be, at the time.
They also showed me ways that I could reduce it without incurring any extra costs.
Just by taking simple steps that meant my estate got smaller.
Finally they made sure that there would be enough money available to pay the tax liability.
And not only that, my wife would have access to these resources almost straight away.
Which, meant she could get things settled sooner.
And they assured me that it didn’t matter where we were living at the time the end result would be exactly the same.”
We’ll come back to Andrew and let him tell his full story later…
We’ll also guide you through the process that we went through with him.
So if you want to find out how this can work for you then keep reading below:
How Andrew made sure his family Could pay the UK inheritance tax bill right away and get access to resources they need!
Many British expats don’t give inheritance tax (IHT) much thought.
For starters no one likes getting a reminder of our own mortality, so we tend to give estate planning a miss.
Also if you’re not living in the UK anymore you might think it doesn’t apply to you.
And finally you’re not going to be around anyway so it won’t be a hassle for you.
The people benefiting should be grateful that they’re getting something, shouldn’t they?
Mortality is a hard one to deal with though so, let’s hope that the answers to the others are motivation enough!
how IHT can get ya!
Sorry to say there’s no such answer and as with most things in life then it comes down to “It all depends”
There’s several factors that will make a difference to how much cover is going to be enough.
Now, we’ve said this before and I’m sure that we’ll say it again!
The main reason for having travel insurance, is to cover potential medical expenses.
There’s other things to claim for, trip cancellation or lost/damaged possessions
Though in the big scheme of things then these are completely insignificant!
Because the financial impact that they’ll have on you won’t make a massive difference to your life
Medical expenses can and will, though!
If the unthinkable happens then the cost of treatment could prove to be devastating
And leave you in a financial hole for the rest of your life
So, this is what we’re insuring against
What are the key factors that we should consider when we ask how much is enough?
Here’s the important stuff to take into account that’s going to make a big difference:
Destination
Activities
These are the two things that are going to make the difference to how much cover you should have.
Let’s start with the the most important…
Destination
or you could do this...
There is another option where the non-UK domicile spouse can elect to have their estate subject to UK IHT.
Though this is on worldwide assets also and could mean that the ultimate bill becomes larger.
If this option is selected then the inter-spousal transfer is without limit.
We’re not going into further detail on this…
Only to say that anyone should take advice before making any decisions!
Here's the real kicker!
IHT needs paying before the estate can clear probate.
The estate has to clear probate before the surviving spouse can get access to the assets.
So let’s say you have a house in London worth £650,000 then that’s the whole allowance gone.
Let’s also say that the deceased had another £300,000 in assets.
That means there’ll be an IHT liability of £130,000…
Then the question is does your family have the resources readily available to pay this bill?
Because that’s exactly what they’ll have to do to get the estate through probate!
As for being grateful...
As for being grateful then yes you’d think that they ought to be, though doesn’t that depend on the situation?
What if you have a partner with a couple of young kids, should they be grateful?
It isn’t as though your seven year old is raking in the bucks already and any inheritance is an extra bonus!
Isn’t it a given that you need to provide for them?
Surely, your partner going to have extra responsibilities with less resources available!
If your kids are independent then yes things are going to be a bit different.
Though again if your partner isn’t British the same situation as before is going to apply.
Anyone who has gone through losing parents will know that processing an estate in the UK isn’t fast.
If there’s a similar process that you have to go through in different countries, then this will make iot even slower.
It’s very stressful for those that you leave behind.
Andrew's story continued...
“I’d been an expat for around seventeen years when I first met with Advisers Worldwide.
I left the UK in 1992 and headed to Hong Kong. From there I moved to Jakarta and then the Asian currency crisis hit the region.
The company I was working with at the time relocated us to Kuala Lumpur.
Whilst Malaysia was also experiencing economic turmoil it was less volatile than Indonesia.
My employer saw it as a much safer option for expat staff in the region.
So, that’s how I ended up there.
When I met with them I’d been there for over 10 years.
Things had moved on and I’d gotten married to Mae Lee ,who’s Chinese Malaysian.
We’d started a family (two boys) and we’d bought a house together, in one of KL’s suburbs.
Malaysia was where we saw our long term future.
I’d changed companies a couple of times and whilst my income was good it was more of a local contract.
That meant that I had to provide much more for myself than I did when I was on an expat package.
The housing and education allowances had gone so I was funding these expenses.
Other benefits like health care and death in service benefit were on a much more local basis.
what he'd done so far
I still had a three bedroom house in Wandsworth that I ‘d bought before I became an expat.
And I’d worked hard to clear as much of the mortgage of this as possible.
I was renting it out and had been pretty lucky with the same long-term tenants for about 8 years or so.
This meant that I was getting rent a bit below market rate, though I was fine with that.
Better the devil you know and they looked after the property very well.
I’d dealt with a financial adviser in Malaysia who’d only focused on investment.
I had a regular savings plan with one of the offshore life companies and a lump sum with another.
I wasn’t getting great service and the performance was pretty poor.
I knew that I needed to do something though I didn’t what.
So, that’s how I ended up where I was.
ready for a change
I’d get lots of calls from different adviser firms, sometimes 3 or 4 a week.
Their pitch was generally the same as the company that I was already using and I wasn’t interested in more of the same.
One weekend I was talking with a mate about investment and money.
I mentioned that I wasn’t happy with the adviser I was using.
He said that I should speak to the company that he was working with.
He was happy with them and felt that he got good advice.
I was a bit sceptical and had reservations I agreed to the contact.
My details were passed to them and they’d call to arrange a meeting.
So I got a call from Advisers Worldwide and scheduled a meeting.
From the start one thing that struck me as being very different was them wanting to know about my insurance.
What did I have both personally and from my employer, life insurance and health cover.
I told them that I had a policy back in the UK which was for my mortgage.
This I wasgoing to clear this in the next three months and would cancel the policy.
I’d also taken a policy out with my brother-in-law who was a local agent for Prudential.
I had some “death in service benefit” from my company as well.
A couple of weeks later they presented a detailed report which looked at my whole financial situation.
shifting priorities
One thing that struck me was the top priorities they gave were protection and estate planning.
These were things that I had always dismissed before.
It turned out that because I had a house in the UK and Mae Lee was Malaysian, estate planning was very important.
I didn’t have a will which was a big problem because I had assets in different countries.
This would mean that my estate was tied up and inaccessable for years
The property in the UK meant that I would be subject to inheritance tax on everything in my name and my share of anything in joint names.
An extra complication was that Mae Lee is “non-UK domiciled”.
Which meant I could only transfer £325,000 plus another £55,000 special allowance.
In total this was £380,000 that I could pass to her without any IHT liability. (This has now changed as detailed earlier).
The London property was worth more than this on its own.
Also the way that I’d set up my life insurance was going to make things worse for her.
It would fall into my estate and there would be inheritance tax charged on it as well.
The savings plans that I’d set up to pay for my sons’ university fees would also get hit for IHT.
All in all if anything happened to me, I was leaving a mess for my wife to sort out.
Even worse whilst we had assets, she wouldn’t have the resources available to clear the liability.
I hadn’t thought it was such a big issue!
Plus I didn’t even live in the UK anymore.
My perception was that if anything happened to me I was leaving my family in a good place.
The fact that I wasn’t and instead was creating a difficult situation concerned me.
She would have to find two or three hundred thousand pounds!
Money that they didn’t have available to hand.
And She’d need to find it before they’d get access to the assets that we had.
This was money that they needed and it would be unavailable!”
andrew today
“That was over 10 years ago now and life has moved on.
Our situation has gotten even more complicated in many ways.
In that time we’ve moved away from Malaysia and lived in three different countries.
Today we live in Switzerland.
We still own property in Malaysia though we don’t see it as our long term home anymore.
I still have my property in the UK. Its value has gone up even more.
The good news is that I can now pass £825,000 to Mae Lee before she starts getting hit with 40%.
The even better news is that I’ve got less assets falling into my estate.
So, I’ve reduced the liability further.
Finally, I know for a fact that if anything happens to me then Mae Lee will have the resources to pay any IHT liability.
No probate or waiting, she’ll have the money available within days at most weeks.”
“It’s something that I don’t even worry about anymore, the complete opposite in fact!
I get enormous satisfaction from knowing that her and the boy’s will be fine financially.
She’ll be able do what we’ve both planned for the boys and she won’t be worrying about paying bills.
We’re a close knit family, losing either of us would be devastating enough!
So, there’s no point in making it anymore difficult than it has to be.”
Andrew implemented a three step strategy.
First he identified the issue and quantified it.
Then he restructured his assets so that the overall issue reduced in scale.
Finally he made sure that he covered the issues so that the resources would be available, fast!
What he got was peace of mind, a real sense of security knowing that his family could take care of themselves.
One less thing to worry about he took control of what he could and forgot about what he couldn’t.“
how you can do it too!
We’re going to breakdown the three steps that we went through with Andrew.
We’ll guide you through each step in detail so that you know exactly what you need to do for yourself.
STEP 1
To address any issue you first need to understand what and how big it is.
So, the initial step is making a list of what you own. What assets do you have in your name?
Property, investments, art, cars anything that you own outright or a share of.
Add it to your list and give it a value.
Don’t forget about any life insurance that you have. If it’s in your name then it’s going to fall into your estate.
Any assets in joint names then take half the value and add that into the list.
When you’ve written everything down add up the total and we can start to work from there.
Take away the £650,000 that a British couple can pass to their kids or a British expat to their non-UK domicile spouse.
On top of this, if you own a property in the UK that you’ve lived in then you can claim Residence Nil Rate Band (RNRB).
This is applicable as long as you are passing the property to a direct descendent.
For couples who are British, currently they can receive an allowance of £175,000 each.
If the value of the property that’s passed is less than this then the remaining allowance is lost.
This is because it can’t be used against other assets.
They CAN pass any unused RNRB allowance to a surviving spouse.
Who can then use it when they pass property through their estate.
This means that potentially a British couple can get a nil rate allowance of £1 million (£325,000 x2 & £175,000 x2).
If you’re an expat with a non-UK domiciled spouse then the most that you can get is £825,000. which is made up as follows:
Nil Rate Band £325,000
Non-UK Domicile Spouse Allowance £325,000
RNRB £175,000
If the value of the property is less than the RNRB, then any remaining allowance gets lost.
This is because it can’t go to the non-UK domicile spouse or against other assets.
So if you qualify for the RNRB and you’re a British couple with a property worth at least £350,000. Then, as we’ve mentioned you’ll have £1 million in total allowance that you can deduct from your estate.
If your property is worth less than this then you need to use the lower value plus the £650,000.
If you’ve got a non-UK domicile spouse and qualify for RNRB you’ll get the lower of £175,000 or the value of the property.
So, you can deduct this from the value of the estate along with the other £650,000.
After you’ve deducted the applicable allowances from the total value of the assets.
What you’ve got left is the value of the estate on which there’ll be an IHT charge. Take 40% of this value and that’s the liability which will be charged to your estate.
So now you know what the IHT liability is on your estate as it stands today. Now it’s time to move onto the next step.
STEP 2
Now you’re going to see how how you can reduce the value of your estate.
Some things will be much harder than others to deal with so let’s start with the easy stuff first.
Your life insurance is a good place to start.
There’s no need for your estate to pay inheritance tax on life insurance benefit payout!
Though you will if you own the policy and you’re the life assured.
We’re not going into enormous detail on this right now.
If you want to know more then our recent post will give you everything that you need.
So you make sure that any life insurance payment falls outside your estate, what’s next?
Have you set up any savings plans for your kids and if so are they in your name?
If they are then this means that the value of the asset will make up part of your estate.
Again this creates an issue not only from an IHT perspective but also in relation to succession.
Taking this out means that you’re reducing your estates value and any IHT liability along with it.
It also means that if anything happens to you the investment itself doesn’t have to be liquidated.
Which would be the case if you owned it. It may not be the best time to sell it.
One way of doing this is to put the kids investments into trust.
This allows the investment to remain intact and keeps the asset outside your estate.
If you’ve set up a savings plan with one of the offshore life companies then they have their own wrap around trusts.
They’ll do the job and they’re usually free.
Otherwise if you’ve got another type of investment then you may need to set up an offshore trust.
This will come at a cost as there’ll be set up fees and ongoing maintenance costs.
Some platform providers allow you to set up an account in your child’s name, whilst giving you control.
You can set it up to put both your partner and yourself in control.
This will also work and will mean that the asset falls outside both your estates.
Plus it will mean that there’s a better succession route for the asset.
Anything that you gift is also a potential IHT liability for 7 years after the gift’s given.
The liability reduces from the full rate after 3 years on a sliding scale.
Then after the seventh year it will fall outside your estate with no further liability.
There are some exceptions to this rule which help in relation to saving for your kids.
First of all both parents (not applicable to non-UK domicile partner) can gift £3,000 per annum. This will immediately fall outside the estate without any IHT liability.
The second exception relates to a parent ability to contribute to their kids savings.
They can add regularly from surplus income and it will immediately be outside the scope of IHT.
It is important that you can show the contributions have been made from income and not capital.
So maintaining records that support this is important!
Is there anything else that you can take out of your estate through gifting or through using a trust?
You should consider it though before you pass any other types of asset in this way it may be worth taking advice.
Once you’ve reduced the value of your estate as much as you can it’s time to look at the liability.
Again we take 40% of the estate value after deducting the allowances applicable to you.
This is what will need paying on your estate before it is able to clear probate.
STEP 3
You’ve done your calculations and there’s going to be an inheritance tax bill on your estate.
What do you want to do next?
The final step is to make sure that the resources are available to clear this liability.
How important this step is will vary from one individual to another.
And it will be depend on their personal circumstances.
If you’re a British couple who’ll be passing assets to their kids then you may be less inclined to take this step.
Whilst you may think that it’s a bonus for them and the least they can do is pay any inheritance tax.
Then that’s for you to decide.
We would again suggest that making sure you have a clear current will is very important at the minimum.
So, you don’t want to do anything about the IHT liability it may be worthwhile telling your kids about it.
They may decide that they want to take steps to make sure that they have the resources available to pay the bill.
Having a non-UK domicile spouse presents a very different situation as it was for Andrew.
Not having the resources available to clear an IHT liability has consequences.
It could mean that your family don’t have the funds available to live day to day.
That’s because assets that they are depending on are stuck in probate awaiting the tax payment.
This may also mean that they have to take on debt to live or to clear the liability.
Property CAN’T be sold to clear an IHT liability.
The only thing accessible from an estate is cash.
Banks can pay money directly to HMRC to clear the liability.
Only then will the estate be eligible to receive a grant of probate.
Other assets are off limits and will remain stuck until there is payment made.
In this situation life insurance provides an excellent tool to pay any IHT liability.
For an expat the only option is an international policy and making sure that it is set up properly is essential.
Any life insurance that you use to provide for the IHT liability should be in addition to other cover you need.
For example you may have a policy designed to clear any outstanding debt or replace lost income.
Those needs will still exist.
Remember even when the IHT liability payment is complete the estate has to clear probate.
This can take time!
how it worked out for andrew
In Andrew’s case he had the Prudential policy that would provide almost enough to clear the liability.
Though it was set up incorrectly and it was a local Malaysian policy.
He was the life assured and the policy owner.
As you should know by now, means the benefit fell into his estate.
This was a really big issue because it would also have to go through the Malaysian probate system.
This is a massive issue because probate in Malaysia is painfully slow.
We also highlighted the that there wouldn’t be a benefit payment if they left Malaysia.
Whilst, he was happy to make the changes necessary to deal with the probate issue.
He was reluctant to abandon this policy because he’d set it up through his brother-in-law.
Plus they’d got no intention of leaving Malaysia so it wasn’t an issue.
That was until it became one…
Andrew’s company wanted to post him to Turkey.
It was a promotion and it would mean a return to the expat package.
Malaysia and its economy were going through tough times there was political strife.
It didn’t quite feel like home anymore.
So they decided that they should take the position and move.
This would mean that the life insurance that they had wasn’t going to work.
Andrew had no debts so he just needed enough cover to make sure that Mae Lee could clear the IHT liability quickly.
We set up an international life policy for him which would pay benefits wherever, they lived.
It was set up with Andrew as the life assured and Mae Lee as the policy owner.
This meant the benefits would pay straight away and avoid any probate.
Allowing Mae Lee to pay the IHT liability and get the estate out of probate as fast as possible.
in his words
“In their initial report Adviser’s Worldwide highlighted the potential IHT issue.
We then worked together to figure out the scale of the problem.
This involved going through what we owned, who and how we owned it.
From there we got an understanding of what the IHT liability was likely to be.
This allowed us to look at whether Mae Lee would be able to clear the debt with the resources she’d have available.
There was no way that she could pay it with what we had.
Seeing it in black and white really had an impact on us and it made the issue real.
The next step was to see how we could reduce the liability.
We had also looked at why we owned what we did and our future plans, what did we intend doing with the assets?
The savings plans that we’d set up for the boys…
We’d done it so that we’d have the money to pay for university.
There’d be enough available so that they’d be able to study where they wanted.
If there was anything left over then it was there to give them a start.
We weren’t putting this money away for us.
Talking to advisers worldwide helped us understand that there were other ownership options.
The company that we dealt with before had set this savings plan up in my name.
It was an offshore life assurance investment, it was on my life and I was the owner.
This meant it would drop into my estate if anything happened to me.
As it stood it just made the situation worse for Mae Lee.
Advisers Worldwide helped us realise that we could change this.
Also it wouldn’t cost us anything to change it.
We used one of the life companies trusts to take ownership of the policy.
They also talked to us about making sure that contributions came from surplus income.
Which also helped prevent it falling back into my estate.
The next thing that we looked at was my life insurance policy.
I’d cleared my mortgages and didn’t have any debt so I could use my existing policy to cover the IHT liability.
Again it wasn’t set up properly and was going to fall into my estate.
Advisers Worldwide recommended I replace my existing policy with an international one.
They said I could insure the actual liability amount in Pounds.
In addition there were two big issues with the local policy.
The first was that the policy was a local one and if I left Malaysia then it wouldn’t pay the benefit amount.
The second was that because it was a Ringgit policy there was a potential currency risk.
If the Ringgit devalued then there wouldn’t be the funds to clear the liability.
I didn’t want to get rid of the policy because it would have been personally awkward for me.
My brother-in law had set it up for us and I didn’t want to upset him or seem ungrateful.
Plus we had no intention of leaving Malaysia.
So I said we wanted to keep the policy.
Again we used a life insurance company trust to make sure that the policy was going to work effectively.
That was it we’d done everything that we could to reduce the liability.
We’d made sure that resources were going to be available to pay the liability.
A job well done!”
but that wasn't it...
“That is until I got the offer of the job in Turkey and we decided to move.
What they’d told me about the existing policy I had played on my mind.
They came back to me with a quote for an international life insurance policy.
It was in pounds and was much cheaper than I’d expected, in fact it was less than I was currently paying.
They advised that we take the policy on my life and have Mae Lee own the policy.
This meant that there’d be no probate delays and Mae Lee would get the payment quickly.
That’s exactly what we did, we filled out the forms, I went for a medical and the policy was set up.
Paying the IHT wouldn’t be an issue for Mae Lee and this gave me a massive amount of satisfaction.
After Turkey we spent three years in China and we’ve been in Switzerland for the past two.
We haven’t needed to do anything else!
The steps that we took still work for us and I know that they’ll continue to if or when we move again.
And that makes me happy!”
What's the impact of IHT on your family?
our exclusive calculator will help you prepare
conclusion
Right now if you’re a British expat and you own property in the UK then you’ve got an IHT issue.
If your partner or spouse is non-UK domicile then that situation is even more complicated.
If they were to lose you then they could be left without the resources that they need to live.
Not only that they could be in this situation for years.
You may have the best intentions and taken measures to help them.
Yet unwittingly you may have made the situation even worse for them.
Without even realising that there was an issue!
Though, no one wants there wife and kids struggling to put food on the table of pay bills…
Do they?
The good news is that if you take the right steps then it’s an easy fix!
Like Andrew you can make sure that wherever you live...
You can make sure that you have the same confidence he has when it comes to dealing with IHT.
The process doesn’t have to be complex and it could be an easy fix for you.
Making sure that your insurance and assets are set up properly can make a big difference to your family.
Getting this right now will mean that your family don’t have financial strife at a difficult time.
You can ensure that they can access everything you wanted them to have and fast.
It’s a three step process that’s easy for anyone to go through and at the end you’ll know, that your family can deal with IHT.
Get started on the first step...
Find out if you have a IHT liability and how much it could be.
Click below and get our FREE IHT Calculator
Easy right?
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