Domicile for IHT purposes in the UK

Posted on Posted in Inheritance Tax

IHT refers to two terms very commonly. Domiciled and Deemed Domiciled. Before we go into discussing the domicile for IHT issues and how a tax payer’s domicile affects his inheritance tax liability, let’s take the dictionary meaning of the word “Domicile.”

Dictionary result for domicile

noun
the country that a person treats as their permanent home, or lives in and has a substantial connection with.
“his wife has a domicile of origin in Germany”
verb
treat a specified country as a permanent home.
“the tenant is domiciled in the United Kingdom”

Domicile

For IHT purposes, there are three types of domiciles.

  • Domicile of Origin for IHT
    • First of all, an individual normally acquires a domicile of origin from his father when he is born.
    • However, an individual is not necessarily domiciled in the country in which he or she is born.
    • For example, if a child is born to British parents in the USA while they are on a vacation, the child won’t automatically get the domicile of the USA.
  • Domicile of Dependency for IHT
    • A child will have a domicile of dependency until he or she is legally capable of changing it. A person has a legal capacity to change their domicile on reaching the age of 16. Until then, if a parent or guardian changes their domicile, the domicile status of the child automatically changes with them.
    • Before 1 January 1974, a woman automatically acquired the domicile status of her husband on marriage. However, for marriages after January 1974, this is no longer the case. It is possible for a husband and wife to have different domicile statuses, although in most cases as their permanent home will be the same, so will their domiciles.
  • Domicile of Choice for IHT
    • Domicile of choice is slightly misleading. Quite often, I am asked questions by the taxpayers if they can choose their domicile as and when required? Well, there is a long process before you can choose a domicile for another country.
    • If you want to prove to HMRC that you have changed your domicile to another country, you will need to leave the UK and settle permanently in another country. HMRC will want to see the evidence that you have abandoned your ties with the UK. Such evidence will include the sale of UK properties and the purchase of properties abroad. Also, you will need to keep your visit to the UK to a  minimum. The deciding factor is the use of words. “Permanent.” If you cannot prove to HMRC that you have “permanently” left the UK, you will still be considered as a Domicile in the UK for IHT purpose.
    • There is a landmark case on the subject of domicile for IHT purpose. It is about Sir Charles Clore. Sir Charles Clore lived most of the later years of your life in Monaco. However, he was unable to show any evidence that he had “permanently” left the country. Hence, his worldwide assets were subject to inheritance tax.

Deemed domiciled for IHT

The concept of deemed domicile is very important for IHT purposes. A taxpayer could be considered as a non-UK domiciled for income tax and capital gains tax (CGT) purposes. But, he can be still considered as a UK domiciled for IHT purpose.

When will an individual be considered as a deemed domiciled for IHT purposes?

An individual is deemed to be domiciled in the UK under two circumstances.

  • When the individual is actually been domiciled at any time in the 3 years preceding a chargeable transfer.
    • Example:

Paul was born in the UK. Between 2003 and 2007 when he was working overseas, he had always been resident in the UK. On 27 August 2015, Ray left the UK to set up home permanently in Australia. He has no plans to ever return to the UK. Ray will therefore be treated as not domiciled in the UK from 27 August 2015. However for inheritance tax purposes, Ray is treated as being domiciled in the UK for the next 3 years – i.e. until 27 August 2018.

Therefore if Ray makes a chargeable transfer before August 2018, UK IHT may be payable. A chargeable transfer means either a gift to a trust or Ray’s death. Therefore if Ray were to die before August 2018, he would die domiciled in the UK and his worldwide estate would be subject to UK inheritance tax. Essentially an individual will remain domiciled in the UK for IHT purposes for 3 years after losing his normal UK domicile. This rule is designed to prevent individuals from taking steps to acquire a domicile of choice outside the UK just before they die, purely in order to save UK IHT.

  • When an individual has been resident in the UK for at least 17 of the 20 tax years ending with the year of transfer. This is the only time when the concept of residence is important for inheritance tax.