Home is Where the Heart is – Deemed Domicile for UK Inheritance Tax
Domicile has historical routes for being known as one’s ‘home’. It is very important to understand your domicile status as this can have a number of tax consequences, especially in relation to UK Inheritance Tax (“IHT”).
This article sets out where an individual can be deemed to be domiciled in the UK for IHT purposes and what this means for taxpayers. Please note that this article specifically relates to IHT and does not discuss Income Tax or Capital Gains Tax.
What is Domicile?
Domicile is a common law concept and can broadly be described as an individual’s permanent home and where they plan to live permanently or indefinitely. For further information on what domicile is and the different types of domicile, please take a look at our previous blog.
Domicile is important because many people are internationally mobile, and domicile helps to identify which UK tax laws are applicable to them.
Why is domicile relevant to Inheritance Tax?
If an individual is domiciled in the UK immediately prior to their death, then UK IHT will be chargeable on their worldwide assets. In contrast, if they are not domiciled in the UK, they will only be subject to UK IHT on their UK assets.
Deemed Domicile – Am I deemed to be UK Domiciled?
New rules were introduced from 6 April 2017 regarding UK deemed domicile for IHT purposes.
Therefore, if you believe that you are not UK domiciled you will need to consider whether you will be deemed to be UK domiciled under these rules:
1. Recent UK domicile status
If you were UK domiciled within three years immediately preceding the ‘relevant time’, you will be deemed to be UK domiciled; for example, this would include individuals who have decided to leave the UK permanently and have acquired a new non-UK domicile of choice.
2. Formerly domiciled residents
An individual can be deemed to be UK domiciled if they are a ‘Formerly Domiciled Resident’ (“FDR”). This would be the case if you were:
- Born in the UK with a UK domicile of origin but have acquired another domicile;
- Resident in the UK for the relevant tax year; and
- Resident in the UK for at least one of the two tax years immediately preceding that tax year.
3. Number of years of UK residence
If you are not UK domiciled but have been resident in the UK for at least 15 of the last 20 UK tax years immediately prior to the relevant tax year (and for at least one of the four tax years ending with the relevant tax year) you will be UK domiciled.
Please see our previous blog on residence status for details on how to determine your UK residence status.
If you meet the conditions to be deemed UK domiciled, UK IHT will be chargeable on your worldwide assets.
Whilst there are benefits of having a non-domicile status, the recent restrictions introduced in 2017 by the UK Government have tightened the requirements of claiming non-UK domicile status and therefore non-UK domicile individuals should have strong evidence to support their claims.
Domicile status is a very complex topic and therefore independent tax advice should be sought when determining your domicile status.