Israel is well known for having no Inheritance Tax or equivalent type of estate duty – for which we thank Menachem Begin’s 1981 pre-election fiscal reforms.
Some retirees see this as an added incentive for moving to Israel to spend out their retirement days. What many people moving from the UK to Israel may be unaware of, is how UK Inheritance Tax can continue to bite, long after having moved to Israel and cut ties with the UK.
Deemed Domicile: A sting in the tail
UK tax legislation recognises that once a UK taxpayer permanently moves their home to outside of the country, they are now non-resident in the UK. What does not change so quickly, from an Inheritance Tax perspective, is the separate and somewhat confusing concept of domicile, which may be best described as “where you belong”. The country you are born in is known as your domicile of birth, while you may subsequently acquire a domicile of choice, if you move to and set up your home in another country.
It is somewhat harder, and certainly takes longer, to shake off your UK domicile for tax purposes. Thus, under longstanding UK tax legislation, a person who was domiciled in the UK for 17 out of the last 20 tax years (6th April – 5th March), continues to be UK domiciled for UK Inheritance Tax purposes, even if they are now non-resident. This is known as deemed domicile.
As a result, a person who made aliya from the UK less than two years ago is still liable to Inheritance Tax in the UK in the same way as if they had remained in the UK. In other words, if they die before losing their UK tax domicile, their estate is technically liable to pay Inheritance Tax in the UK on their worldwide assets, whether their assets are in the UK, Israel or anywhere else (subject to the usual allowances).
It’s only getting harder to avoid IHT
As if that wasn’t bad enough, under current proposed legislation in the UK Parliament, the amount of time it takes to shake off UK tax domicile is soon to get quite a bit longer. Instead of 17 out of 20, individuals who have had a UK domicile for 15 out of the previous 20 tax years will continue to be deemed to have a UK domicile. Once the legislation passes, this will apply retrospectively from 6th April 2017. In other words, you will need to have lived in Israel for at least 4 years for you to be free of the perils of UK Inheritance Tax.
What if I keep assets in the UK after losing my UK domicile?
Even if you have survived the waiting period and are now fully Israeli domiciled, if you keep enough assets in the UK for your estate to need a grant of probate, you will have to pay Inheritance Tax if your UK estate exceeds the threshold for tax (currently £325,000).
Are there any tips for managing the IHT risk?
There are fundamentally four key strategies to mange the risk of your estate facing a substantial bill for tax if you die within the first 4 years of aliya:
- Use your annual allowances: you are allowed to give gifts each year which are absolutely free of any risk of tax. If you have enough liquid cash available, use these allowances.
- Make potentially exempt gifts in good time: larger gifts can be taxable if you die within 7 years of making the gift. If you plan your estate well, you can do these gradually and increase the chance of surviving 7 years. You can also take out an insurance policy against the risk of not surviving 7 years.
- Life Insurance written in trust: this is a form of life insurance policy, which, when you die, triggers an automatic payout to a named beneficiary, with no need for a grant of probate first. This sum can then be used to cover any Inheritance Tax which may be due. Premiums can be quite high, but as the risk of Inheritance Tax ends once you have spent long enough in Israel, you can take out term cover, which lasts only for as long as you face the risk of IHT, and is cheaper than the alternative, whole of life cover, which is payable until you die.
- Divest from the UK: as mentioned above, if you keep assets in the UK even after you have lost your UK deemed domicile, you may still face an IHT bill. However, if you make sure your assets are situated outside of the UK, you will not be subject to any IHT risk.
Each person’s requirements will of course differ greatly, so it is very important that you seek specialist advice that suits your own circumstances.
Contact us for a pre- or post-aliya assessment of the best estate planning for your circumstances.