AIDAN BAILEY of The Fry Group reveals how domicile of origin and other factors impact your UK Inheritance tax responsibilities.
As a British expatriate, the key to deciding if you’re liable for UK Inheritance tax (IHT) is based on the concept of domicile. If you’re domiciled in England, Wales, Scotland or Northern Ireland, taxable estate includes global assets. But if you’re domiciled elsewhere, taxable estate is limited to UK assets only.
Assessing your domicile requires a detailed examination of your background. At birth you acquire a domicile of origin from your father. But if your father is deceased at the time of your birth, or if you were born out of wedlock, your domicile of origin is determined by your mother. Upon adulthood, you can establish a domicile of choice in another country by demonstrating you’ve severed all connections with your “homeland” and have established permanent ties elsewhere. If you move to another country, your domicile of choice will remain as is until you establish a fresh domicile of choice.
If you’ve emigrated from the UK you remain domiciled in the UK for three tax years after departure. A foreigner entering the UK is only domiciled after being a UK resident for tax purposes for more than 16 tax years out of 20 years. Despite frequent references to the “17 out of 20” rule, it’s unsafe to act on the 17th year. If married couples have different domiciles the usual inter-spouse or registered civil partner transfer rules are also affected. So be careful when transferring assets from a UK-domiciled spouse or registered civil partner, to a foreign-domiciled spouse or registered civil partner and vice-versa.
A potential charge to tax arises when you “gift” assets during your lifetime or upon death. While you’re not required to pay IHT on the first £325 000, any excess will be taxed at 40 percent. Attitudes to IHT vary. Some people feel it’s important to retain all assets, while others don’t see the point in saving Income Tax and Capital Gains Tax during their lifetime, if it results in assets being subjected to 40 percent IHT when they die. If you fall under the latter category you can take measures to reduce or eliminate IHT altogether. As a homeowner, you could be caught in the IHT net by default – even before taking into account the value of your investment. For an unmarried individual with valuable property or substantial investments, the burden is obviously considerable.
The Fry Group has developed a user-friendly guide using flowcharts to help you minimise or eliminate IHT. By answering a series of questions, you’ll be directed towards an IHT planning solution best fitting your needs. Email email@example.com to request a copy of the chart today.
Aidan BaileyBA (Hons) CertPFS AWPCM
General Manager Singapore, International Division