Inheritance Tax Guide for British Nationals Living in Thailand

Whether you have lived in Thailand for two years or two decades, if you are British, UK inheritance tax (IHT) is an issue that you should consider sooner rather than later.

While you shouldn’t worry unduly, don’t make the mistake of assuming that because you have been living in Thailand for donkey’s years that the HMRC has no claim on your assets after you die.

This is an error made by many Brits and it can be an extremely costly one.

As a cautionary tale, I give you the case of silver screen superstar, Richard Burton, who lived in Switzerland for 27 years to avoid paying tax in the UK.

The simple fact of having bought a burial plot in Wales, even though he was not ultimately buried there, was considered enough of a link to the UK to make his estate liable for UK IHT – resulting in a bill of £2.4million. Ouch!

You may not have the millions that Burton had, but owning a house, or having cash in the bank in the UK, could bring you over the IHT threshold in the UK.

In this guide I'll cover the rules surround IHT, and what you can do to mitigate a potentially big bill.

Contents:

1. UK residency versus UK domicile
2. How to change domicile
3. UK inheritance tax rates
4. Transfers between spouses of different nationalities
5. Assets liable for inheritance tax
6. How to lower a potential IHT bill
7. The benefit of a will
8. Getting help with inheritance tax planning

1. UK Residency Versus UK Domicile

When looking at inheritance tax liability, it is important to understand the difference between residency and domicile.

Residence is where you physically live the majority of the time. If your main home is in Thailand and you live here 180+ days of the year, you are a Thai resident.

However, your domicile is determined at birth, usually based on your father’s place of birth, and it does not generally change during your lifetime.

2. How to Change Domicile

Technically it is possible to acquire a domicile of choice, though this is usually a lengthy and bureaucratic process and has serious implications, so it is not a decision to be taken lightly.

Even if you have official confirmation of a new domicile of choice, a number of factors are taken into account, which could mean you are still deemed UK domiciled by HMRC after your death, when you are no longer around to contest the fact.

These include having UK bank accounts, owning property or other assets in the UK, strong family ties, frequent visits, etc.

If you are deemed UK-domiciled after your death, the tax man will come calling to see if inheritance tax is due on your estate.

3. UK Inheritance Tax Rates

UK inheritance tax is charged at 40% above certain thresholds:

A Nil Rate Band (NRB) of £325,000 is applied to all estates in the UK. Under this threshold no IHT will be payable. So if you don’t own assets worth over £325,000, you needn’t worry about IHT.

This NRB is passed between UK-domiciled spouses, so if unused when the first UK-domiciled spouse dies, it is transferred to the second, who can pass on £650,000 of assets without paying IHT. Anyone deemed UK-domiciled with assets over the thresholds relevant to them should take a look at their situation.

4. Transfers Between Spouses of Different Nationalities

If you are from the UK and have a foreign spouse, this is really important.

Assets can pass between two UK spouses free of inheritance tax. However, if you are UK-domiciled and your spouse is not, you can pass a maximum of £650,000 to them. Any assets above that will be liable for IHT.

If you have a large estate and a Thai spouse (or, indeed, a spouse of any other nationality) you should definitely seek advice from a qualified professional.

If you have questions or concerns regarding your financial affairs, I can pass your details on to an IHT specialist.

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5. Assets Liable for Inheritance Tax

It is important to note that inheritance tax is charged on all assets owned worldwide, not just those in the UK; that includes property and assets that you own in Thailand or elsewhere, such as bank accounts and investments.

Some assets, such as pensions, including SIPPs, QROPS, and QNUPS, and certain other investments are exempt from IHT, but you should definitely take expert advice on this from a qualified financial adviser.

6. How to Lower a Potential IHT Bill

There are a number of ways to solve the issue of a hefty inheritance tax liability.

These include:

1. Spending all your money (probably not what your heirs want you to do)
2. Gifting assets (beware – rules on gifts apply)
3. Setting up a Qualifying Non-UK Pension Scheme (QNUPS)
4. Purchasing specifically-designed life insurance products and setting up certain types of trust to benefit your children, partner or spouse.

Two examples of trusts often used for this purpose are discounted gift trusts and excluded property trusts. Pension contributions with certain structures are also a commonly used solution, but you need to be sure to select the right ones in discussion with a professional with the relevant expertise.

An IFA will look at your overall situation and suggest suitable products based on your unique requirements. Getting this wrong could be a costly mistake.

7. The Benefit of a Will

However large or small your estate, a will is essential to make sure your wishes are adhered to after your death. All estates over a certain amount are subject to the probate process, which can be a lengthy one.

Life insurance can be a useful tool to ring-fence money outside of an estate in order to provide funds to cover the probate process and everyday living expenses for your family while they wait for probate to be completed.

8. Getting Help with IHT Planning

IHT is a complicated issue and, in case I would strongly advise that you take professional advice to fully understand your situation and the options open to you to lower your liability.

There is not a one size-fits-all answer for estate planning, as there are so many different factors to consider.

If you do seek help, make sure the adviser you choose is fully qualified. I would also advise choosing someone who has experience of cross-border financial planning.

If you would like an introduction to my IFA, use this form.