Inheritance Tax Domicile

The concept of domicile is important in determining liability to the inheritance tax in the UK. If a person is domiciled in the UK the inheritance tax can apply to that person’s assets wherever they are situated, in the UK or overseas. If a person is not domiciled in the UK, however, the inheritance tax can only apply to that person’s assets located in the UK.

The country of domicile is the jurisdiction with which the person is most closely associated, in terms of regarding that country as their ultimate home. Each person has a “domicile of origin” at birth, this being the jurisdiction that is regarded as home by that person’s father at the time of their birth. The domicile of a person cannot legally be changed until the age of sixteen, and until this is possible their domicile will depend on the domicile of the person they are legally dependent upon.

A person can however later acquire a different jurisdiction as their domicile, referred to as their “domicile of choice”. The domicile of choice is another country where the person has taken the decision to settle down and it has become a permanent home. For the purposes of the inheritance tax, the tax authorities would require strong evidence that the person’s domicile has changed.

A person should be in a position to present evidence if required to back up the change of domicile of choice. This could be for example acquiring a residence in the country where the person has chosen to live permanently, making a will there, obtaining citizenship of the country and breaking links where possible with the previous country of domicile. If the person has retained the right to vote in elections in the previous country of domicile, this will not be taken into account by the UK in determining the person’s present country of domicile.

The UK law has introduced a concept known as “deemed domicile” that can be applied to ensure that inheritance tax applies to a person’s worldwide assets even after that person has acquired a non-UK domicile of choice. Where under the general law of the UK a person is not domiciled in the UK, that person will nevertheless be regarded as domiciled in the UK at the time of a transfer of value if the following conditions apply:

Within the three years immediately before the transfer of value the person was domiciled in the UK; and That person was resident in the UK in at least seventeen of the twenty tax years immediately before the tax year when the transfer took place.

By introducing a test based on residence in the UK, this provision makes it more difficult for a person to acquire a different domicile of choice just for the purpose of avoiding the necessity to pay inheritance tax on a particular transaction. The UK could remain the deemed domicile of a person for up to three years after leaving the country and changing domicile.

Problems arising from domicile

The domicile of a person makes a great difference to the potential amounts of inheritance tax payable, as a UK domiciled person may have to pay inheritance tax on the transfer of assets located anywhere in the world. People who are non-UK domiciled are not liable to inheritance tax on their assets located abroad and have greater possibilities to manage their tax position to ensure that no unnecessary inheritance tax is paid.

Sometimes problems may also be caused if a person is unable to establish and prove UK domicile to the satisfaction of the tax authorities. One potential problem that arises is that the exemption from inheritance tax for transfers of value between spouses or civil partners is limited if the donor spouse is UK domiciled and the other spouse is of non-UK domicile. In this case, the transfer is exempt from inheritance tax only up to the first £55,000.

To avoid this situation occurring, it would be best for the non-UK spouse to acquire UK domicile as a domicile of choice and keep sufficient evidence to back this up in case it is questioned by HM Revenue and Customs. As mentioned above, ensuring a permanent residence in the country of domicile, making a will there and obtaining citizenship would be important pieces of evidence.

Sources:

HMRC website www.hmrc.gov.uk

“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009