The Australian capital gains tax (CGT) and (IHT) can combine to create a total tax rate of 85% after the passing of a loved one.
For individuals who have resided in both countries, it is important to seek specialised advice before their passing in order to effectively plan for tax implications.
Understanding the basics
UK Inheritance Tax (IHT)
The UK charges IHT at 40% on estates that are above the lifetime nil rate band of £325,000. Other reliefs, such as the main residence nil rate band (which is £100,000 from 6 April 2017 to 5 April 2018 for estates valued at £2 million or less) and business and agricultural property reliefs, may also apply. Furthermore, transfers between married couples are exempt from UK IHT where both spouses have the same home for UK tax purposes.
Domicile refers to a person’s permanent home country. Determining domicile can be complex, and the tax law definition differs between the UK and Australia. Broadly speaking, you are UK domiciled if:
a) Your parents were British;
b) You were born and raised in the UK until at least age 16;
c) You still hold a permanent home in the UK and intend to return to the UK as your long-term home or have not yet established a domicile in another country.
Currently, UK IHT is levied based on whether an individual is domiciled in the UK for UK IHT purposes. UK domiciled individuals are required to pay IHT on all their assets worldwide. If a person is UK domiciled at the time of their death, they are only liable for UK IHT on assets located in the UK. Assets located outside the UK are not subject to UK IHT.
However, this is expected to change as of 6 April 2025. Under the proposed changes, once an individual has been a UK tax resident for over ten years, their entire estate worldwide will be subject to UK IHT upon their death. The proposal also specifies that once an individual is within the UK IHT framework, it will take a further ten years of non-UK tax residence for them to be exempted from the UK IHT on their worldwide assets.
Where a person died between 6 April 2017 and 5 April 2025, the individual was ‘deemed domiciled’ in the UK after being a UK tax resident for 15 out of the last 20 tax years. Therefore, if a person was born in Australia but has been a UK tax resident for 15 years or more, they will be UK domiciled for UK IHT purposes.
The rules are applied differently for people born in the UK and living in a UK domicile. If an individual is a UK tax resident for the current tax year and at least one of the two preceding tax years, they will be deemed to be UK domiciled.
Under UK tax law, an individual can change their domicile by moving to another country, but the responsibility is on the individual to prove that there has been a change in domicile status, which can be challenging to demonstrate.
UK Capital Gains Tax (CGT)
The base cost of assets for the estate and the beneficiaries for CGT purposes will be the market value of the assets at the time of death. For a UK-only estate with no connection to Australia, UK Inheritance Tax (IHT) is payable on the value of the entire estate at death. Any increase in the asset’s market value from the date of death until the disposal is subject to UK CGT.
Australian Capital Gains Tax (CGT)
There is no IHT in Australia, but this does not mean that death has no tax implications. Australian CGT can apply to death.
In most cases, the beneficiary inherits the deceased individual’s CGT cost base for assets acquired by the deceased after 19 September 1985 (the date of commencement of Australian CGT law). Therefore, if an asset is sold by an Australian estate with no UK aspects, Australian CGT is payable on the difference between the deceased’s cost base and the sale price, assuming that the asset was purchased by the deceased after 19 September 1985.
Assets acquired by the deceased prior to 20 September 1985 are CGT free until the date of the deceased’s death; in this case, the asset’s cost base is its market value on the date of death. No CGT will be payable if the asset was the deceased’s primary residence and the property is sold within two years of death. Special rules exist for assets where the deceased was not an Australian tax resident at the time of their death.
Complications when both UK IHT and Australian CGT apply
There is no provision for UK IHT to be offset against Australian CGT under the UK/Australian Double Tax Agreement (or vice versa). The withdrawn Australian Taxation Office ID 2005/40 confirmed this position.
The outcome is that challenges arise in the following scenarios involving UK IHT and Australian CGT on death:
- Where the deceased is UK domiciled and UK tax resident but dies holding Taxable Australian Real Property (TARP), UK IHT will be payable at 40% (subject to reliefs). If the asset is sold, Australian CGT will also be payable based on the difference between the cost to the deceased and the sale price. If tax is payable in Australia at the top marginal rate, this will be 45% (excluding the Medicare Levy – which does not apply if the beneficiary is not an Australian tax resident). The 50% CGT discount was abolished for those who are not Australian tax residents from 8 May 2012 (on a pro-rata basis for periods of non-residence). This results in an effective tax rate of 85% (i.e. 40% UK IHT plus 45% Australian CGT) on the inherited asset.
- Where the deceased dies domiciled and tax resident in Australia for (Australian and UK tax purposes) and holding CGT assets situated in the UK. UK IHT will be payable at 40% (subject to reliefs) on the UK located assets. If the assets are sold Australian CGT will also be payable, on the difference between the cost to the deceased and the sale price. For example, for an Australian tax resident beneficiary who is not a UK tax resident who earns over $190,000 AUD per annum, CGT will be payable on the gain at 23.5%, assuming that the 50% CGT discount applies (47% x 50%). If the asset’s cost base is negligible, this results in an effective tax rate of 63.5% (i.e. 40% UK IHT plus 23.5% Australian CGT) on the inherited asset.
- Where the deceased dies as a tax resident in Australia for Australian tax purposes but is UK domiciled for UK IHT purposes, UK IHT will be payable at 40% on their worldwide estate (subject to reliefs). If the estate sells the assets, Australian CGT will also be payable based on the difference between the cost to the deceased and the sale price. I.e. 40% UK IHT plus 23.5% Australian CGT on the inherited asset (assuming the 50% discount applies).
- Where an individual who is an Australian tax resident beneficiary inherits assets from a UK estate that paid UK IHT at 40%, and later sells the asset, an effective tax rate of 63.5% is payable (i.e. 40% UK IHT plus 23.5% Australian CGT) on the inherited asset, assuming that the 50% Australian CGT discount applies.
- From 6 April 2025, when an individual dies and they have been a UK tax resident for a period of ten years but not a non-UK tax resident for the last ten years of their life, UK IHT will be payable at 40% on their worldwide estate (subject to reliefs). If the estate sells the assets, Australian CGT will also be payable based on the difference between the cost to the deceased and the sale price. I.e. 40% UK IHT plus Australian CGT at up to 45% if the estate is an Australian tax resident.
Next steps
Navigating estate planning across Australia and the United Kingdom (UK) can be quite complex. It’s essential to seek professional advice to ensure you’re achieving the best possible outcome for you and your loved ones after you pass.
Our experienced specialists have the national depth and global reach of our network to provide you with the right insights and advice so you can feel confident about your estate plan.
Speak with your local Nexia Adviser today. We are your personal finance partner with the resources and expertise to help you navigate complex financial challenges and achieve your goals.
This article was originally published June 2015 and updated June 2024.
