It has just been announced that the relentless climb in inheritance tax receipts in the UK continued in 2023, with a record £7.5 billion in taxes received by HM Revenue & Customs. This represents a tripling in the amount paid over the past 15 years.
According to Britain’s Office of Budget Responsibility, inheritance tax could be worth nearly £10b. a year to the Treasury by the end of the decade, with the percentage of estates impacted by the charge forecast to double.
This projection is before the potential impact of proposed rule changes comes into effect, including a suggestion that olim (immigrants) from the UK may have to wait 10 years to escape the inheritance tax net.
For most Britons, inheritance tax is levied upon death and is payable at the rate of 40% on the value of the estate to the extent that it exceeds the nil rate band, which is currently £325,000.
Olim from the UK frequently assume that by making aliyah, their liability to British estate taxes disappear. Unfortunately, this is far from true. The misconception comes from a lack of understanding about the difference between four concepts: citizenship, which has little bearing on UK-Israeli taxation; residency, which is relevant for income and capital-gains tax; situs (location), and domicile, which both affect inheritance tax.
Passport for the United Kingdom of Great Britain and Northern Ireland (credit: PEXELS)
The complexities of Anglo-Israeli tax law
The process of changing your domicile is a complicated issue. This is essentially achieved by shedding your UK domicile of origin and replacing it with an Israeli domicile of choice.
It is often the case that an oleh from Britain becomes UK tax nonresident but still has a liability to inheritance tax in one of two ways.
Firstly, due to situs rules (i.e., where the assets are situated), investments held in Britain, such as property, are usually subject to inheritance tax when someone dies even if they have lived in Israel for many years.
Secondly, if an oleh remains domiciled in the UK, irrespective of whether they become tax nonresident, then they will be liable to UK inheritance tax on their worldwide assets. Detailed advice is recommended.
AdvertisementIf you can acquire an Israeli domicile of choice, it is generally advisable that as many assets as possible are moved outside of the UK. Moving investments to a third country, such as the Channel Islands, may result in benefit from the 10-year, post-aliyah exemption from Israeli income and capital-gains tax while placing such assets outside of the UK for inheritance-tax situs purposes.
An issue currently causing concern is the possible impact of the UK government’s recently proposed changes to non-dom (non-UK-domiciled) rules and its move to a residence-based system, starting on April 6, 2025. There is a proposed “tail” provision that would keep a person within the scope of inheritance tax for 10 years after leaving the UK. Whether this becomes a part of the final legislation remains to be seen.
Further Israeli aspects: Israel currently does not have an inheritance tax, but after the 10-year tax holiday, Israel imposes a capital-gains tax on the overall gain in inflation-adjusted shekel terms from inherited assets. This may be mitigated. One way is to pay Israeli tax on the post-10-year portion of the gain if you made aliyah. Another way may be to request a “step-up” of the cost of an inherited asset (e.g., from UK parents) to its market value upon the date of death of the deceased donor, where applicable.
Timing of aliyah also matters because olim who make aliyah after the end of 2025 must disclose their foreign income and gains to the Israel Tax Authority even if they are eligible for the 10-year exemption from Israeli tax thereon.
Special care is needed if you change your mind and/or decide to leave Israel or perhaps head to the UK. It currently takes at least four Israeli tax years to cease to be fiscally resident in Israel. But if you succeed, there is an exit tax (really Israeli capital-gains tax) to contend with. Complications arise in each country, and proposals exist to further tighten the Israeli exit tax rules, probably after the war. Again, it is recommended to take detailed advice.
What else? Tax isn’t everything. Consider spreading your investments and currency risks. The sterling-shekel exchange rate has its ups and downs, and an election is on the horizon in Britain. In addition, much can be said about the Israeli economy.
As always, consult experienced tax and investment advisers in each country at an early stage in specific cases.
andrewa@piowealth.com, leon@hcat.co
Andrew Album is a senior wealth manager at Pioneer Wealth in Herzliya. Leon Harris is an accountant and tax adviser based in Ramat Gan.
