Show Transcript
Do you own property across the pond? Are you a U.K. citizen living in Canada? If so, the U.K. inheritance tax could have an impact on your estate plans. Sébastien Desmarais, Tax and Estate Planner, TD Wealth, joins Kim Parlee to dig into what people need to know about this tax as well as potential changes on the horizon.
Print Transcript
* Welcome back. Do you own property in the UK as a Canadian? Are you a UK citizen living in Canada? If so, the UK inheritance tax is something you may want to have on your radar, especially because it's undergoing some changes. Sébastien Desmarais is Tax and Estate Planner at TD Wealth. He joins me now to discuss what people need to know about this tax and how it may apply.
- Sébastien, great to have you with us. I'm just going to jump right in. Canada does not have an inheritance tax, but the UK does. So what is, exactly, the UK inheritance tax?
* So as you mentioned, Canada doesn't have an inheritance tax. On death, you are deemed to dispose of your assets at fair market value, which will result in income inclusion and capital gains tax. The United Kingdom takes quite a different approach.
- If on your death you are domiciled in the United Kingdom, your fair market value of the estate will be subject to an inheritance tax. Now, to be fair, there are a few exemptions available to individuals, the main one being that everyone is afforded a basic exemption of £325,000 British pounds. What it means is if the value of your estate is under that threshold, there'll be no tax to pay.
- On the other hand, obviously, if the value of the estate exceeds the exemption amount, the value will be subject to 40% inheritance tax. So anything over and above the exemption will be subject to a significant tax in the UK. So as you can see, Kim, there's quite a bit of a contrast between how Canada and the United Kingdom approach taxation at death.
* Yeah. That's an understatement. 40% is a big number, Sébastien. OK, so that's how it works if you live in the UK and you're subject to that with that asset threshold. Now let's talk about someone living in Canada who could be subject to the UK inheritance tax. Tell us who those people might be.
* So there's, essentially, three instances where the UK inheritance tax may be a concern to Canadian estates. First, if at the time of death you own UK assets-- as an example, you inherit a flat in London and a small house in the countryside-- and the value of your UK property is over and above the UK exemption, then your estate will be subject to UK inheritance tax on your UK assets on the value exceeding the exemption. The second example is if you were living in the UK, moved to Canada, and died within three years from moving to Canada, the rules in the UK will deem that individual to be domiciled in the UK.
- And the full value of their estate will be subject to UK inheritance tax. The third example is a bit more technical. If you were born in the UK, your domicile of origin is the United Kingdom. So if at the time of death there's ever an issue as to in which jurisdiction you were domiciled, you were moving from one province to another, as an example, and it's unclear which province you were living in, then the rule is that it will revert back to your domicile of origin, the United Kingdom.
- And, as a result, the full value of the estate, then, would be subject to the UK inheritance tax. Those are, essentially, the three instances where the UK inheritance tax might be a concern to a Canadian resident.
* OK. So if I am a Canadian or person with UK citizenship who is listening to this right now, my ears perked up if I fall into any of those three categories. Tell me, what are you required to do then?
* So because the inheritance tax is levied at the estate level, it will be the executor who bears the responsibility to deal with the tax. So the executor, the Canadian executor, will have to file the relevant form and pay the tax on behalf of the estate. Interestingly, in the UK, probate will not be granted before the tax is paid.
- Therefore, it's important for the executor to act quickly. Otherwise, this could translate into delays in the administration of the estate. And obviously, this is always to the detriment of the beneficiaries.
* And one would hope, I guess, that the person who had deceased might be aware of the exposure for something like this. It would not be a fun surprise.
* Yeah, indeed. We hope that this was planned ahead of time for the estate and the beneficiaries.
* OK, so I understand-- OK, again, you're still kind of bringing up our knowledge as we kind of catch up to you, Sébastien. This is for somebody in the UK, this is now the situation for someone who may be living outside the UK, and then on top of that, there's some changes going on.
* Yes, indeed. So in the last month, the last budget, the UK government introduced significant changes that would apply to the inheritance tax. And those changes would become effective in 2025. That being said, it's important to appreciate that the main changes would be that the inheritance tax would move from a domicile regime to a residency regime, which is a significant change.
- However, there is an upcoming election in the United Kingdom this fall, and it's unclear whether the new government will follow through with the changes, might bring amendments to those changes, or will simply abandon them altogether. So it's still unclear whether these changes will ever see the light of day. So what I would say, Kim, to your viewers, is, stay tuned.
[MUSIC PLAYING]
- Sébastien, great to have you with us. I'm just going to jump right in. Canada does not have an inheritance tax, but the UK does. So what is, exactly, the UK inheritance tax?
* So as you mentioned, Canada doesn't have an inheritance tax. On death, you are deemed to dispose of your assets at fair market value, which will result in income inclusion and capital gains tax. The United Kingdom takes quite a different approach.
- If on your death you are domiciled in the United Kingdom, your fair market value of the estate will be subject to an inheritance tax. Now, to be fair, there are a few exemptions available to individuals, the main one being that everyone is afforded a basic exemption of £325,000 British pounds. What it means is if the value of your estate is under that threshold, there'll be no tax to pay.
- On the other hand, obviously, if the value of the estate exceeds the exemption amount, the value will be subject to 40% inheritance tax. So anything over and above the exemption will be subject to a significant tax in the UK. So as you can see, Kim, there's quite a bit of a contrast between how Canada and the United Kingdom approach taxation at death.
* Yeah. That's an understatement. 40% is a big number, Sébastien. OK, so that's how it works if you live in the UK and you're subject to that with that asset threshold. Now let's talk about someone living in Canada who could be subject to the UK inheritance tax. Tell us who those people might be.
* So there's, essentially, three instances where the UK inheritance tax may be a concern to Canadian estates. First, if at the time of death you own UK assets-- as an example, you inherit a flat in London and a small house in the countryside-- and the value of your UK property is over and above the UK exemption, then your estate will be subject to UK inheritance tax on your UK assets on the value exceeding the exemption. The second example is if you were living in the UK, moved to Canada, and died within three years from moving to Canada, the rules in the UK will deem that individual to be domiciled in the UK.
- And the full value of their estate will be subject to UK inheritance tax. The third example is a bit more technical. If you were born in the UK, your domicile of origin is the United Kingdom. So if at the time of death there's ever an issue as to in which jurisdiction you were domiciled, you were moving from one province to another, as an example, and it's unclear which province you were living in, then the rule is that it will revert back to your domicile of origin, the United Kingdom.
- And, as a result, the full value of the estate, then, would be subject to the UK inheritance tax. Those are, essentially, the three instances where the UK inheritance tax might be a concern to a Canadian resident.
* OK. So if I am a Canadian or person with UK citizenship who is listening to this right now, my ears perked up if I fall into any of those three categories. Tell me, what are you required to do then?
* So because the inheritance tax is levied at the estate level, it will be the executor who bears the responsibility to deal with the tax. So the executor, the Canadian executor, will have to file the relevant form and pay the tax on behalf of the estate. Interestingly, in the UK, probate will not be granted before the tax is paid.
- Therefore, it's important for the executor to act quickly. Otherwise, this could translate into delays in the administration of the estate. And obviously, this is always to the detriment of the beneficiaries.
* And one would hope, I guess, that the person who had deceased might be aware of the exposure for something like this. It would not be a fun surprise.
* Yeah, indeed. We hope that this was planned ahead of time for the estate and the beneficiaries.
* OK, so I understand-- OK, again, you're still kind of bringing up our knowledge as we kind of catch up to you, Sébastien. This is for somebody in the UK, this is now the situation for someone who may be living outside the UK, and then on top of that, there's some changes going on.
* Yes, indeed. So in the last month, the last budget, the UK government introduced significant changes that would apply to the inheritance tax. And those changes would become effective in 2025. That being said, it's important to appreciate that the main changes would be that the inheritance tax would move from a domicile regime to a residency regime, which is a significant change.
- However, there is an upcoming election in the United Kingdom this fall, and it's unclear whether the new government will follow through with the changes, might bring amendments to those changes, or will simply abandon them altogether. So it's still unclear whether these changes will ever see the light of day. So what I would say, Kim, to your viewers, is, stay tuned.
[MUSIC PLAYING]
