One of the big attractions of living and investing here is the fact that the emirate has no tax on purchasing residential property. Unfortunately, for Britons living in Dubai and contemplating UK inheritance tax, it really isn’t that easy.
Two key factors affect the potential inheritance tax liability of Britons living in Dubai. The first is a complex legal concept called “domicile”. Among other things, this decides whether or not you are within the scope of UK inheritance tax.
You may live in Dubai, but that doesn’t necessarily mean you have a legal domicile here. The “domicile of origin", generally inherited from your father at birth, is extremely hard to lose. To establish a domicile of choice in Dubai you must have made your home here and have the intention of remaining here permanently or indefinitely. This is difficult – although not impossible – in a jurisdiction not offering permanent residency or citizenship to foreign workers.
Domicile is so important because if you have a UK domicile, inheritance tax covers all global assets, not just those in the UK. The bill will be calculated on everything you own worldwide, including any UAE property.
The second factor is the application of UAE law in the event of death. If there is no recognised and enforceable will in place, the default position is based on Sharia wherein an estate will be divided according to a predetermined formula, with family members receiving a fixed share based on certain factors.
Assets in the UK, whether owned by a citizen or overseas investor, fall within the scope of the country’s inheritance tax law. So when a person dies and assets are transferred to the next generation, 40 per cent tax is payable.
The good news is that the law allows part of every estate to remain tax-free. Firstly, any asset left to a surviving spouse is tax-exempt. Secondly, the first £325,000 (Dh1.59 million) left to any other individual is known as the “nil rate band”, and is also tax-free. Thirdly, a new exemption can also apply — the “residence nil rate band”. It is currently limited to an additional £125,000 and can be claimed where a residence is left to direct descendants. But it’s subject to more stringent conditions and will not apply in all circumstances.
Imagine this scenario
Frank and Amanda are both UK domiciled and live in Dubai with their two children, Daniel and Emma. Frank owns a villa in Arabian Ranches, plus cars and Dubai savings, with a total value of £1 million (Dh4.88 million). He also has assets in England worth £1.5 million.
Frank has an English will, leaving everything to his wife. But he doesn’t have a DIFC Courts will. He then dies unexpectedly. The English assets are easily dealt with. Amanda inherits them by Frank’s will and no tax is payable.
In Dubai Sharia applies: as Frank’s parents are dead, Amanda inherits only one-eighth of the estate, worth £125,000. Daniel receives double the share of his sister, Emma, in the remainder. This is unlikely what Frank wanted; it also hugely increases the inheritance tax burden.
If Frank had drafted an appropriate will leaving all his estate, in England and Dubai, to his wife then the entire amount would have been tax exempt, because no tax applies if the money goes to a surviving spouse. But now a large percentage of the estate will be taken by the taxman. Amanda’s £125,000 share of the Dubai estate is exempted, as a surviving spouse. So is the family’s allowance under the nil rate band, which is £325,000. The residence nil rate band is not available.
The remaining £550,000 will be taxed at 40 per cent, producing a tax bill of £220,000. The family will probably have to sell assets to pay the bill, damaging their future wealth and security.
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