The subject under discussion here is UK Inheritance Tax and it is a complicated and often misunderstood tax.
It not only has a relevance to UK residents, but this article will be relevant for those living outside the UK who could well be still in the IHT net.
The main points relating to IHT are as follows:
- If you are a UK domicile at the date of death your estate is liable to pay IHT on the value of your worldwide assets. That is an absolute;
- Your place of residence is irrelevant;
- There is no tax for individual UK domiciles if the estate is worth less than £325k. For husband and wives this rises to £650k and may even reach £1m. Once the relevant threshold is reached tax will be due;
- The rate of tax is 40% on the excess over the relevant threshold. So, for example a husband and wife with an estate of £850k would have a final tax bill of £80k;
- Last UK tax year the UK HMRC collected just over £5billion in IHT, and every single penny of that could have been avoided. This is a voluntary tax-it is only paid if you so wish.
The key to IHT is therefore your domicile status.
There are three categories of domicile to examine in order to determine current domicile status:
- Domicile of origin. Here you take the domicile of your father from birth. If he was a UK domicile you take that as well. Liken your domicile of origin to a badge, it is stuck on you and will stay with you for life unless or until it changes. For as long as you have a UK domicile your estate will be liable to IHT on death.
- Deemed domicile. This is often completely ignored. If you have been resident in the UK for more than 15 out of the last 20 tax years you have a UK deemed domicile. This will come into play for those who have left the UK to live in say Portugal. It means that for 5 years after a UK departure the individual will still have a liability for UK IHT if death occurs within those 5 years. There is nothing that can be done to reduce or eliminate this time factor.
- Domicile of choice. Here you acquire a new domicile, say Portuguese or Spanish and it will replace your domicile of origin. That in turn means UK IHT will no longer apply to your estate. If there is a liability to tax it will determined by your existing country of residence. So, for example Cyprus does not have IHT at all so if you acquire a Cyprus domicile of choice there will be no UK IHT to pay on any transfers of assets, in life or death.
A key point to take on board is that an individual can only have one domicile at any one time – a critical factor.
That makes things a lot easier to grasp but a little more examination is required. The problem category is the domicile of choice status – how do you get this?
In order to acquire a domicile of choice you need to satisfy two tests:
- That you have severed all ties with the UK. Everything of significance in the UK is no longer retained. So that means having no property, no bank accounts, no investments, no club memberships in the UK, to name but a few; AND
- That you intend to reside permanently in your new country of residence. Of course, the key word here is intend, and that is open to a number of interpretations. What do you have to do to show the intention to be permanent? Buy a house, open bank accounts and make your new country the centre of your family social and business life. Every item of significance in the UK is simply transferred out to your new country.
If you can satisfy both tests you could well acquire a new domicile, this will be of choice and could be say Portugal, Spain or Cyprus or any country. Thereafter local inheritance tax laws would apply but UK IHT would no longer be due on your worldwide assets.
Unfortunately, there is no rule or regulation that says a domicile of choice has been acquired at any particular time or event.
Every case is different and that is why it is so difficult to be certain about one’s domicile status at any given time.
Permanence means permanence and would be established after residing in your new country but to obtain a new domicile of choice takes a number of years to achieve and needs a lot of commitment and discipline.
Having determined your current domicile status, planning can start in order to reduce/eliminate the tax and benefit your successors.
The Chase Buchanan teams consult with clients worldwide, crafting inheritance tax strategies bespoke to your circumstances, wishes, and estate. For a private discussion with the IHT experts, contact your local wealth management office, to explore which routes will offer you the most tax-efficient options.
*Information correct as of January 2021