Gifting is a strategy often used to efficiently pass on wealth and assets to younger generations and loved ones.
When managed carefully, it can form part of an effective estate plan that looks to preserve your legacy and mitigate Inheritance Tax (IHT).
The rules around gifting UK-held assets are clear, but it can become more complicated if you’re gifting foreign-held assets.
Read on to find out how the UK gifting rules work and why you may have additional considerations if your assets are held in another country.
UK Inheritance Tax rules can still apply if your assets are held abroad
You may assume that UK IHT and gifting rules don’t apply if your assets are held abroad, but this is often not true.
The key points regarding the UK IHT rules for expats are:
- You are considered a long-term resident (LTR) if you have been a UK tax resident for either 10 consecutive years or for at least 10 of the 20 tax years immediately before your death
- Your foreign assets are liable for UK IHT if you are an LTR, even if you die while living abroad
- If you are not an LTR, UK IHT will only apply to your UK-based assets. Depending on where you are based, you may also be charged IHT in the country where you are a resident.
If you are liable for UK IHT, the main allowances are:
- The standard nil-rate band of £325,000 – This is available to everyone.
- The residence nil-rate band of £175,000 – This is available if you leave your main residence to your direct descendants, but it tapers for estates worth over £2 million. It also applies to foreign properties, provided the property is your main home.
- Spousal exemptions – Transfers between spouses and civil partners are generally exempt from UK IHT, though there may be limits if one spouse is an LTR and the other is not, or if one spouse is a non-UK national.
Alongside these key allowances, there are several other strategies you can use to help preserve more of your estate, such as putting assets in trust, investing in Business Relief schemes, and, of course, gifting.
UK allowances can help keep gifts efficient and can apply to foreign-held assets
If you want to gift assets to pass them efficiently to your loved ones, several allowances help ensure the gifts won’t count towards your estate for IHT purposes. These rules typically also apply to foreign-held assets, provided you are an LTR.
Gifting allowances include:
- The annual gifting exemption – This allows you to give away up to £3,000 each tax year free from IHT. You can also carry forward unused allowances for one year and combine your allowance with that of your spouse or civil partner.
- Wedding gifts – You can give gifts ranging from £1,000 to £5,000 to someone getting married or forming a civil partnership, with the amount depending on your relationship to the recipient.
- Small gifts – You can give multiple small gifts of up to £250 per person per year, as long as they don’t form part of a bigger gift.
- Gifts made from surplus income – You can give gifts from surplus income, provided the gifts are made regularly and don’t adversely affect your standard of living.
Any gifts you make outside these allowances are usually treated as Potentially Exempt Transfers (PETs). This means they are not subject to IHT when the gift is made, but they could be included in your estate if you die within seven years.
If you live for seven years after making the gift, it will generally fall outside your estate for IHT purposes. If you die within those seven years, the gift may still be liable for IHT, although taper relief can reduce the amount owed.
Foreign countries may have their own gifting and Inheritance Tax rules
It’s important to remember that foreign countries, such as Spain, may have their own rules regarding gifting and IHT. This can mean that even if a gift falls within the UK gifting allowances, you may still be charged tax on it at local rates, depending on where you’re based.
Indeed, in some countries, the recipient of a gift may face a tax charge if they are based there, even if the gift or the giver is not.
So, if you’re planning on giving gifts as part of your estate planning strategy, or you may receive a gift from someone who is, it’s important to work with a financial planner with international expertise to ensure the gift is efficient.
There are several risks to be aware of when gifting foreign-held assets
Common risks associated with gifting foreign-held assets include:
- Unexpected CGT bills – When you gift certain assets, they may be treated as if you’ve sold them at market value. This means any gains could be taxable, even though no money has changed hands, which can lead to an unexpected Capital Gains Tax (CGT) bill. You may also face CGT charges in the country where you’re based or where the asset is held.
- Jointly owned assets – If you jointly own a foreign-held asset with someone else, you may need to take both your LTR statuses into account to understand how the gift may be taxed.
- Currency fluctuations – If you’re gifting foreign assets or transferring funds in another currency, exchange rates can affect the value of the gift. This could affect both the amount received by the recipient and the potential tax liability.
- Gifts with reservation of benefit – If you give away an asset but continue to benefit from it, it may still be treated as part of your estate. For example, if you gift a foreign-held property to a relative but continue to live or stay there without paying market-rate rent, it may still be liable for IHT.
- Losing control of assets – It’s always important to remember that once a gift is made, it’s usually irrevocable. So, you need to be confident that your own financial needs are fully covered before making significant gifts.
Get in touch
If you want to gift foreign-held assets, we can help ensure you understand all the tax implications involved and organise your strategy efficiently.
To speak to a financial planner, get in touch.
Email contact@ambient-wm.com or call us on +34 658 077 450.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.