Are you born in the UK and currently residing in Australia? Are you worried about the UK Inheritance Tax?
The UK Budget announced significant changes to UK Inheritance Tax (IHT) which may present an opportunity for you with the right planning.
Here we explain some of these changes and what they may mean for you:
1. Inheritance Tax (‘IHT’) threshold
The IHT threshold unchanged at £325,000 until 2030.
2. Long -term resident
Up until 5 April 2025, individuals born in the UK to UK domiciled parents will have a UK domicile of origin. It was very difficult to remove a UK domicile of origin, and therefore it often takes many years of living in Australia (or elsewhere in the world), and severing of most/all ties with the UK to cease to be UK domiciled and to acquire an Australian domicile of choice. The UK Budget is replacing the former domicile system of taxation with a long-term residence system from 6 April 2025. This represents an opportunity for UK expats living in Australia, for the last 10 years or more as it will make it much easier for people who were born and raised in the UK to cease to be subject to UK IHT on their worldwide assets.
As a result of the legislative changes, many UK expats living in Australia for 10 or more of the last 20 years will no longer be subject to UK IHT on their worldwide assets. However, all UK sited assets will be subject to UK IHT on the death of the individual. Therefore, many UK expats living in Australia will want to review their UK situated assets, to see if they should move sell their UK assets or otherwise move their assets outside the UK.
There are stricter tax implications for long term residents and accordingly it becomes critical to determine one’s residential status (for example, in case you qualify as a long-term resident then IHT will be charged on your non-UK assets as well).
3. Unspent UK pensions
Did you know your unspent pension funds in UK will be subjected to UK IHT? Yes, that’s correct. This is with effect from 06 April 2027. Thus, one must effectively plan for their pension schemes in the UK.
- One of the options may be to transfer existing pension schemes to an Australian Superannuation Fund that is a Recognised Overseas Pension Scheme (otherwise known as QROPS) with HM Revenue and Customs in the UK. This may be effective from a UK and Australian income tax planning perspective as well.
We have tax and financial advisers at Nexia who can advise you on transferring your UK pension scheme to an Australian Superannuation Fund that is a QROPS.
4. Disposal of UK residential property
Many UK expats will now want to consider selling their UK residential property prior to passing away, and moving the funds outside the UK to avoid UK IHT on death. Note that there are UK and Australian capital gains tax implications of selling UK property whilst you are UK tax resident.
In case you dispose of your UK residential property and have Capital Gains, then you must report the same to HMRC within 60 days in a specified form capturing all the relevant details of the property and any reliefs available. However, you must be aware that certain reliefs and exemption are available whilst computing your CGT.
At Nexia we can advise you on the UK and Australian capital gains tax implications of selling your UK property.
5. Agricultural and business property relief
This is relevant for people with assets that qualify for agricultural and business property reliefs (APR & BPR). Only the first £1 million of farms will be exempt from UK IHT. The remaining value will only attract 50% combined APR & BPR. This proposal has caused much uproar in the UK amongst farming communities, however to date there is no sign of the UK Government backing down on this proposal.
In addition, certain non-listed shares, such as shares on the Alternative Investment Market (AIM) will only attract 50% BPR. Previously these shares benefited from 100% BPR.
Next steps
If you are affected by any of these changes, please contact us as soon as possible to discuss ways that we can assist you.
We have expertise in assisting high-net worth families in following aspects –
- Cross-border tax & estate planning (especially between UK and Australia)
- Advice on the UK/Australian Double Tax Agreement;
- Lodgement of UK and Australia tax returns;
- Taxation of UK pension schemes;
- Taxation of foreign investment bonds including life insurance policies;
- Taxation of trusts including offshore trusts; and
- Tax advice on the sale of UK properties.
Please contact your local Nexia advisor to help identify the right approach for you.