UK Domicile: Do You Have An Inheritance Tax Liability?

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BENJAMIN FRANKLIN FAMOUSLY said there are two certainties in life: death and taxes. So why don’t more people plan for them? Those of us who are UK domiciled will potentially be liable to UK inheritance tax (IHT) on our demise. We each have a nil rate band (NRB) of £325,000 which is the sum our beneficiaries can inherit free of tax before IHT is applied on the excess. We also have a Residential Nil Rate Band (RNRB) which applies to residential property if left to direct descendants only.

This is currently £125,000, increasing to £150,000 in April of this year, and the final increment to £175,000 in April of 2020. Therefore, if you currently have a house that you live/lived in worth over £125,000 to be left to direct descendants, and you have an estate worth over £450,000 (£325,000 NRB + £125,000 RNRB), you could be liable to IHT.

If you are UK domicile and married to a UK domicile spouse/civil partner, you can also transfer up to 100% of your NRB and RNRB to them or vice versa, with IHT only applied on the second demise. Non-domicile spouses can also elect to become UK domiciled to benefit from the transfer of bands, and as a result, have IHT be due on second demise only.

It’s also worth noting that the RNRB is tapered for those with estates over £2m, at £1 for every £2 over, so currently you would therefore lose this allowance entirely if your estate was worth over £2,250,000.

So what is UK Domicile? Technically it is defined as a ‘country an individual regards as their permanent home’. I’m often correcting expats who have been residents here for a long time who were adamant they wouldn’t have an inheritance tax liability. Domicile and residence are quite different, and UK domicile is very difficult to shake. There are no fixed rules and it’s down to the individual to prove having acquired a new domicile.

From 6th April 2017, you’re UK domiciled if you’re a resident in the UK 15 out of the last 20 years before the relevant year. You also have a domicile of origin which is acquired at birth, which is typically taken from your father, and you follow his domicile until you’re aged 16. It is possible to elect a new domicile of choice, but a number of actions are considered when determining this such as:

• Living there
• Expressed intention to stay
• Buying a house in the new country and disposing of UK property
• Cutting all ties to the UK
• Acquiring citizenship
• Establishing a business in the new country
• Registering to vote
• Intention to be buried/cremated in new country

For those breaching the nil rate band of £325,000, they will be subject to 40% IHT on their worldwide estate, or 36% should they leave over 10% of their taxable estate to a registered charity. With such vague guidelines on whether one is UK domiciled or not, it’s always best to err on the side of caution and assume that a liability is present. Even for those fortunate enough to have gained a new deemed domicile, things can always change in the future, and it’s best to this potential outcome well planned for.

There are numerous solutions to help mitigate your IHT liability. It’s best to speak to a professional for advice and recommendations tailored to your personal circumstances. I’m highly qualified in this area and would be happy to help. If you’d like to arrange a non-obligatory discussion, please feel free to get in touch.

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Sam is a UK-qualified Independent Financial Adviser and strives to raise the standards of international financial planning in Malaysia. He has been based in KL since 2009 and represents Infinity Solutions Ltd in partnership with UK-based Wealth Manager – Tilney Group. You may direct any inquiries to [email protected] or call +6017.3499 686

This article was originally published in The Expat magazine (February 2018) which is available online or in print via a free subscription.

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