Expats may still have to pay UK inheritance tax

Living outside the UK to avoid inheritance tax is a myth and the long arm of the taxman will reach out to the furthest flung corners of the world if he thinks there’s money in it for him.

Many taxes are based on residence - like income tax and capital gains tax.

So if you leave the UK and live overseas the income you earn is subject to the tax rules of that nation.

Don’t ignore the domicile rules

Then there’s the ‘five year rule’ over CGT that generally means after five tax years absent from the UK, a taxpayer becomes non-resident and falls outside of the UK’s CGT rules.

Again, you become liable for CGT  - if it’s applicable - in the country where you live.

Most people have a false belief that this also applies to inheritance tax. But there’s a twist. IHT is based on domicile not residence and domicile is proved if:

• You are UK born
• Your father was UK born
• You have a British passport
• Keep a home or a burial plot in the UK

IF HM Revenue and Customs can prove one or more of the above and you have an estate overseas in excess of the IHT threshold, they can pursue your estate for 40% tax on the excess over the threshold - and often do.

QROPS can help minimise IHT

So even if you feel you have put your roots down overseas, unless you take in to account the effect of domicile on UK and foreign taxes, fleeing the country to save tax could come to nothing when you die.

Expert estate planning advice is clearly needed by wealthy expats whose estate will exceed the IHT threshold - currently standing at £325,000.

This is where a QROPS can help - because the fund in your offshore pension scheme is regarded as outside of your estate and as such is exempt from IHT.

Make sure your estate planning advice covers UK inheritance taxes as well as those in the country where you plan to settle.