Inheritance tax domicile
Written by Ray Coman
The scope of inheritance tax is affected by domicile. UK domiciled individuals are liable to inheritance tax on their worldwide assets, whereas non-UK domiciled individuals are only liable to their assets situated in the UK. A person is treated as domiciled in the UK if resident for income tax purposes in the UK for 17 out of the past 20 years. A person must be non-domiciled in the UK for three years before being treated as no longer UK domiciled for inheritance tax purposes.
The exemption for transfers of assets between spouses is restricted to the nil rate band (currently £325,000) where the recipient spouse is not domiciled. Prior to 6 April 2013, the cap was set at a lower limit of £55,000. The restriction is introduced to prevent overseas assets being transferred to a non-domiciled spouse and therefore escaping UK inheritance tax.
Whilst the above provides a general overview of the subject, individual circumstances must be taken into account and the interaction of inheritance tax with other tax should be considered. We would be pleased to help tailor a plan to minimise your inheritance tax. Please contact us to discuss if you would like advice in this area.
Comments
Just to clarify, I have been classed as non-UK resident for 7 consecutive tax years after submitting a P85 to HMRC in 2012. I have severed all links to the UK except for remaining in touch with my adult daughter there. I have no intention of returning to reside in the UK and believe that I have a strong pima facie case to put to HMRC that I have acquired a domicile of choice.
After some more internet searching, I have learned that UK HMRC rarely provide domicile rulings until they become relevant for tax purposes. The position now for IHT is that only where there is a “significant risk of loss of UK tax” after death will HMRC consider pursuing an enquiry and providing a ruling on an individual’s domicile.
As a general comment, I think it is grossly unfair that HMRC tend not to rule on a person’s domicile until after the individual has died and can no longer explain their actions and intentions or provide supporting evidence on their own behalf. This unfairly leaves a person in the dark before (as after) death regarding their estate’s tax liability and makes it difficult for them to effectively plan for the disposal of their net estate without being able to calculate its value. It would be much better if HMRC were to develop a transparent and objective ‘Statutory Domicile Test’ along the lines of the Statutory Residence Test that one could use at any time whilst alive, but clearly they prefer to keep it all under wraps until after one is dead and they can rule that one is still UK-domiciled on some pretext or other so they can pursue IHT if they think it worth the costs. It’s outrageous, really.
If you have been non-UK resident for at least three consecutive tax years and it is not your intention to return to the UK, it is good idea to establish a domicile of choice outside of the UK, so that your non-UK assets will be outside of the charge to UK inheritance tax.
I am not aware of a specific method of notifying HMRC that you are not domiciled. The substance of your circumstances rather than any legal form (such as an HMRC letter) establishes domicile. Domicile will probably be relevant to tax on the date that you die. Given that your circumstances and residency could change between then and now, I doubt HMRC would provide you with any kind of advance clearance. You are required to self assess your domicile on the IHT form which states your liability.
Your final burial place, registration on the electoral roll, correspondence address for HMRC purposes and various other family, social and economic ties are used to determine domicile.
If you did not file a Tax Return in the tax year of departure from the UK, you should have completed a P85 to notify HMRC when you left the UK. Consider submitting a UK Tax Return which uses your overseas correspondence address and includes a residency questionnaire.
Land and property situated in the UK remains liable to UK inheritance tax regardless of your domicile. Spousal transfers are free from inheritance tax.