How does Inheritance Tax apply to non-UK residents?

My wife and I have been married for 43 years; we have two children. I’m British but my wife is Norwegian; as are my children. I live in England but she moved back to Norway 29 years ago. Believe it or not, we are still happily married (!). My life is now dominated by IHT because, as a non-UK resident, she cannot inherit my estate tax-free. As my estate will exceed the £350k nil-rate band, she is going to be faced with a very large IHT bill (I know my kids can gain an extra £175k exemption if I gift my property to them as is my intention). I understand the ‘7-year rule’, the giving of gifts, moving/downsizing my property, my exempt-from-my-estate pension (still uncrystallised), and some other rules about valuables and cash. But I’m still very concerned that my spouse/children are going to have a very large tax bill to pay for general UK ‘infrastructure’ (repaired potholes, etc.) when, as residents of Norway, they are not going to be the beneficiaries of any of those likely tax ‘improvements’. If you are still reading this… thank you! But I wonder whether you may have any suggestions as to how my current situation — which can’t be unique… we have had jet planes for some time — might be resolved less expensively for my family?

It seems like you have a reasonable understanding of the various options available to help reduce your estate's potential Inheritance Tax (IHT) liability. It is challenging to provide 'suggestions', as these could be interpreted as 'recommendations'. Given the complexity of the situation, an IFA (me) would require a substantial amount of both hard and soft facts. Additionally, the fact that your wife is a non-UK resident adds further complications, probably necessitating advice from their side as well. Here are some general points to consider:

Cash Flow Forecasting

I find that clients often know they have an IHT liability but are unsure exactly what this will be in the future. By using cash flow forecasting, we can model a range of scenarios to consider, factoring in market meltdowns, increases in expenditure, years of great investment performance, and years of poor investment performance, etc. It is helpful to do this on an annual basis as life circumstances change.

Risk Tolerance, Capacity for Loss, and Objectives

Consider tolerance for risk, capacity for loss, and objectives. Only then can one be confident that any strategy used to mitigate a potential IHT liability will be suitable. For example, someone could have a low tolerance for risk but a very high capacity for loss. This could open up a range of riskier options for products that might not have been considered otherwise when only the client's natural appetite for risk was taken into account.

Business Relief (BR)

Business Relief (BR) allows certain business assets to be passed on free of IHT or with a reduced IHT rate, depending on the type of asset and how long it has been held. These assets typically need to be held for at least two years before they can qualify for 100% relief. There are various options within this area, with some carrying more risk than others, and there are options to draw an income if the investor wishes. It is important to properly diversify within the sector when using BR.

Potentially Exempt Transfers (PETs)

Often, the simplest solutions can be the best, such as Potentially Exempt Transfers (PETs). However, these transfers should be planned well in advance alongside a cash flow forecast. If the donor dies within seven years, the gifts will be taxed on a sliding scale.

Life Insurance Policies

Depending on one's situation, life insurance policies written in trust can work for some people and should not be immediately discounted, even though they might be out of fashion.

Trusts

Trusts have become less popular over the years due to complicated structures, lack of flexibility, high charges, legislation and the growth of BR propositions. However, they shouldn't be immediately discounted.

Spouse Exemption

Another consideration is whether your spouse is investigating the process of electing to be treated as UK domiciled for IHT purposes. This election could allow them to use the full unlimited spouse exemption. However, it is important to carefully consider potential legislative changes and seek professional advice.

Finally

It is important to note that this is a broad overview and not specific advice. Other areas should also be taken into consideration, as all rules are subject to change (and typically do), especially following a general election. Investing in assets qualifying for BR often involves small, unquoted companies and is less liquid than those listed on the main market.

Consulting with a financial adviser and tax specialist is highly recommended for personalised advice and strategies.

I hope this helps!