Who is Liable for UK Inheritance Tax?

Inheritance Tax (IHT) is a significant consideration for many individuals, particularly those with assets in the UK or those classified as UK domiciles. Understanding who is liable and how the tax applies can help you plan effectively and minimise unnecessary tax burdens for your loved ones.

The UK government has recently announced several key changes to IHT that will impact a growing number of individuals and families. These changes include:

• The freezing of the nil-rate band (£325,000) until April 2030 – This means that as property values and asset prices continue to rise, more estates will exceed the threshold and become subject to IHT.
• Changes to Business Property Relief (BPR) Adjustments to these exemptions could mean that fewer assets qualify for IHT relief, particularly for those who own businesses.
• The removal of IHT exemptions for pensions – This could lead to a larger portion of inherited pension assets being subject to IHT.

With these measures in place, more people will find themselves liable for IHT, making proactive estate planning more essential than ever.

IHT applies to the estates of all British domiciles, regardless of where they live. This means that even if you have moved abroad permanently, your estate may still be subject to IHT on your worldwide assets.

The nil-rate band (NRB) currently stands at £325,000, meaning estates valued below this threshold are not liable for IHT. However, any amount exceeding this is taxed at 40%, unless exemptions or reliefs apply.

Understanding UK Domicile Status

Your domicile status determines your IHT liability. Domicile is typically determined by your father’s domicile status at birth (if your parents were married) or your mother’s status in other cases. Being born outside the UK does not automatically mean you are a non-UK domicile if your father was UK-domiciled at the time of your birth.

If you are a UK domicile, your entire worldwide estate is liable for IHT, regardless of how long you have lived abroad.

What Assets Are Liable for IHT?

IHT is charged on all assets owned at the time of death, including:

• Property in the UK and abroad
• Savings and investments
• Business assets (subject to reliefs)
• Pensions (subject to new rules)

Certain reliefs may reduce the taxable value of a business.

Can You Lose UK Domicile Status?

Changing your domicile status is possible but complex. You must:

• Sever all ties to the UK (e.g., no UK properties, memberships, or frequent visits)
• Establish permanent residence in another country
• Demonstrate the intent to remain abroad permanently

Even after leaving the UK, it can take at least six years to change your domicile status for tax purposes.

Spousal Exemptions & Allowances

Married couples and civil partners benefit from IHT exemptions:

• Spousal exemption: Unlimited tax-free transfers between spouses or civil partners (if both are UK domiciles)
• Transferable nil-rate band: Any unused portion of the £325,000 NRB can be transferred to a surviving spouse, effectively doubling their threshold to £650,000

The Growing IHT Burden

With the nil-rate band frozen for another six years and property prices continuing to rise, more families will find themselves above the IHT threshold. Previously, IHT was often considered a tax only for the wealthy, but now middle-class families, particularly those who own property, are increasingly affected.

For example, in 2023/24, HMRC collected a record £7.5 billion from IHT, and this figure is expected to grow as more estates fall into the taxable bracket.

Final Thoughts

IHT planning is essential to prevent your beneficiaries from facing large tax bills. Various legal strategies, such as lifetime gifting and whole-of-life policies, can help reduce liabilities. Consulting an adviser can ensure you take advantage of the best options available.

Given the recent changes, now is the time to reassess your estate plan and ensure you are prepared for the potential tax burden. If you are unsure of your exposure to IHT or need advice on reducing your liability, speaking to your Broadbench adviser is highly recommended.

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