How much tax would I pay with a a ￡2 million estate?

I was asked earlier this week how much tax I would pay on a a ￡2 million estate?

Before I go through the calculations, it is important to cover off domicile and how this impacts people as there is a misconception that whilst I live overseas individuals are not subject to UK IHT.

What is Domicile and how does it affect me?

Domicile is a legal concept that refers to an individual's permanent home or the place where they have their closest ties and consider as their permanent home. It is used to determine an individual's tax residency and inheritance tax liability.

In the UK, domicile affects an individual's tax liability in several ways. For example, UK domiciled individuals are subject to UK tax on their worldwide income and gains, whereas non-UK domiciled individuals are only subject to UK tax on their UK income and gains.

Additionally, an individual's domicile status can also impact their liability for UK Inheritance Tax (IHT). UK domiciled individuals are subject to IHT on their worldwide estates, while non-UK domiciled individuals are only subject to IHT on their UK assets.

There are three types of domicile recognized in the UK: domicile of origin, domicile of choice, and deemed domicile.

Domicile of Origin:

Every individual is born with a domicile of origin, which is typically the same as the domicile of their father at the time of their birth.

Domicile of Choice:

An individual can acquire a domicile of choice by residing in a new location with the intention of making it their permanent home. This is known as acquiring a new domicile by choice. In order to change one's domicile of origin to a domicile of choice, they must demonstrate that they have abandoned their previous domicile and have taken up residence in their new location with the intention of making it their permanent home.

Deemed Domicile:

UK residents who have lived in the UK for more than 15 of the previous 20 tax years are considered to have a deemed domicile for tax purposes. This means that they are treated as UK domiciled for inheritance tax and other tax purposes, regardless of their actual domicile of origin or domicile of choice.

The concept of domicile is important for UK tax purposes, as it affects an individual's liability for UK taxes. UK domiciled individuals are subject to UK tax on their worldwide income and gains, whereas non-UK domiciled individuals are only subject to UK tax on their UK income and gains.

How much tax would I pay on with a a ￡2 million estate?

If you are UK domiciled and have a ￡2 million estate, you may be subject to UK Inheritance Tax (IHT). The current nil rate band for IHT is ￡325,000, and the standard rate of IHT is 40%.

For an estate valued at ￡2 million, the amount of IHT payable would be calculated as follows:

￡2 million estate - ￡325,000 nil rate band = ￡1,675,000

￡1,675,000 x 40% IHT rate = ￡670,000

So, if you are UK domiciled and have a ￡2 million estate, you may be required to pay ￡670,000 in Inheritance Tax.

It is important to note that this is a general example, and there may be other factors that impact your IHT liability, such as exemptions and reliefs. Additionally, IHT laws and rates are subject to change, so you should consult a tax professional for specific and up-to-date advice regarding your personal tax situation.

At Hoxton Capital, we are able to give you specific advice on the topic and show you ways of protecting assets to reduce potential IHT.