How domicile affects IHT?

The subject of domicile does not affect the vast majority of people who live in the UK – they were born in the UK, they live in the UK, they have a domicile of origin in the UK and they are subject to UK inheritance tax.

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The subject of domicile does not affect the vast majority of people who live in the UK – they were born in the UK, they live in the UK, they have a domicile of origin in the UK and they are subject to UK inheritance tax.

However, there are a number of people who have come into the country and have still not lived here for more than 15 years and therefore have not acquired what is called deemed domicile.

Domicile and residence are not exactly the same thing. Residence is a relatively temporary situation which can change from year to year. Residence applies to income tax and capital gains tax, whereas your domicile status is only applied when there is a potential inheritance tax issue.

If you are born in the UK, you have a domicile of origin in the UK.

Just because you live abroad or have lived abroad for a number of years, does not mean you lose your domicile of origin. You have to go through a number of steps to do that – it is not an automatic process. It doesn’t matter if you have lived abroad for a long time – your domicile of origin is still the UK and your worldwide assets are potentially liable to UK inheritance tax.

If you have family who have emigrated to other countries, this needs to be alerted to them because more and more HMRC is trying to collect these taxes due.

To severe your domicile with the UK you will need to comply with several conditions. You actively have to get a domicile of choice in another country, a separate passport and you have to give up all links with the UK – no bank accounts, no investments, no properties. Lastly, even if your UK passport has lapsed, you still need to apply to HMRC to officially severe your domicile.

If you don’t severe your domicile or you don’t do it properly, you will be potentially liable for inheritance tax on your worldwide assets. There is no statute of limitations.

In the reverse situation when you come to live in the UK, before you become deemed domicile, you need to have been resident for 15 out of the last 20 years. Even if you’re in year 14, you can still do tax planning to avoid inheritance tax which is different to what you would do as a UK-domicile. Once you are UK deemed domicile, you are taxed for UK inheritance tax in the same way as a UK-domicile and your worldwide assets are subject to UK inheritance tax.

If you’re not yet UK-domiciled and/or you have parents are not domiciled in the UK with significant assets offshore which they intend to leave to you during their lifetime or on their death, you should definitely look at the tax planning you can do and especially Excluded property trusts.

An Excluded property trust is a specific type of offshore trust which is set up in an offshore jurisdiction and it can save a significant amount of income tax, capital gains tax and also inheritance tax.

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