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A guide to UK inheritance tax

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By Annette M Houlihan

Many British expatriates are unaware that even if they have lived abroad for years, their estate may still be liable for UK inheritance tax.

Inheritance tax is the tax paid on a (global) estate when the owner of that estate dies. Depending on certain criteria, the tax may also be payable on gifts or trusts made during that person’s lifetime.

Inheritance tax thresholds

Inheritance tax in the UK is charged at either 36 or 40% on any global assets over the value of £325,000. For (UK) married couples and civil partners, the combined threshold is £650,000, providing the executors transfer the first spouse/partner’s unused inheritance tax threshold to the second partner when they die. The surviving spouse can receive their partner’s estate tax free, however when the second spouse dies, their children would receive a bill of 40% on anything over £650,000.

Whether you are liable or not comes down to whether you are still deemed domicile in the UK.

Domicile explained

Domicile is the country a person officially has as their permanent home or has a substantial connection with. When you’re born, you are automatically assigned to the same domicile as your parents. This is your domicile of origin. If your parents were not married, your domicile of origin will typically be the same as your mother, although this may vary depending on individual circumstances.

Your domicile of origin then continues until you acquire a new domicile. However, even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.

Why is domicile important?

Domicile is important for a number of reasons, not least of which is determining your tax liabilities in three main areas: income tax (from investment or employment), capital gains tax and inheritance tax. It is key in determining how your individual estate should be passed on in the event of your death and is of particular importance if you own property or financial assets in foreign jurisdictions.

Deemed Domicile

As well as domicile of origin, for British expats who live abroad there is also a concept of ‘deemed domicile.’This means that even if you are not domiciled in the UK, under general law HMRC could treat you as domiciled in the UK at the time of a transfer if:

  • you were domiciled in the UK within the three years immediately before the transfer, or
  • you were resident in the UK in at least 15 of the 20 income tax years of assessment ending with the year in which you make a transfer.

Domicile of choice – changing your Domicile

After the age of 16, you can change your domicile. To do this you will need to satisfy a number of criteria and be able to provide evidence to support each one. The criteria for changing your domicile are varied and each case will be judged on its merits incorporating the evidence provided. The basic criteria for changing your domicile will typically include as an absolute minimum:

  • Leaving the country in which you are domiciled and settling in another country
  • Removing ties from your initial country of domicile e.g. selling or renting out your home and cancelling club memberships (trivial but important)
  • Providing strong evidence that you intend to live in your new location permanently or indefinitely (buying a new home, getting a job, sending children to school)

When it comes to determining your country of domicile, the tax man will interpret the conditions and draw their own conclusion about whether you are still domicile in the UK. Due to inheritance tax being such a major revenue earner for the UK government, changing your domicile can be a difficult and stressful process, and even then your efforts may not be considered enough.

Stating “I have been out of UK for x years” does not change your domicile, only your residency.

One mistake many British expatriates make is to leave their domicile of choice, for example Hong Kong, to live in another country, say Thailand or Malaysia, for retirement. On doing this, they default back to UK domicile until their new domicile of choice is accepted by HMRC – which would be in another 15 years or so.

Note that if you return to the UK and become re-resident, you automatically assume UK domicile.

The difference between domicile and residency

There are two elements when it comes to the concept of ‘domicile.’ One is where you have your permanent home i.e. where you live. This is not the same as residency. The second is your ‘domicile of origin,’ which is where your father’s permanent home was if your parents were married when you were born, or your mother’s if they were not. So, you could have been born in France, but if your father/mother was English, your domicile of origin is the UK.

Domicile and residency usually go together but for certain taxation purposes (e.g. income tax or inheritance tax) your particular mix of residency, ordinary residency, domicile and domicile of origin will make a difference to what tax you have to pay.

If you have non-domicile status in the UK, only UK based assets will be liable to UK inheritance tax.

Protecting your assets from inheritance tax

Mitigating inheritance tax can be a very complex process if you decide to proceed without any advice or assistance, therefore it’s strongly recommended that you seek advice from an independent financial adviser who will be able to talk you through each of your options.

If you believe your estate is worth more than £325,000 (and considering the rise in UK and Hong Kong house prices the number of people reaching this threshold is growing by the week), the use of a number of tax-efficient financial structures can help you not only avoid inheritance tax but also potentially increase the final value of your estate as well.

If you are concerned about potential inheritance tax, or would like clarification on how to legally avoid UK inheritance tax, CareySuen Will Services can help. Your initial consultation is free and will enable you to find out how you could avoid any potential inheritance tax on your assets.


Contact Annette M Houlihan, managing director of CareySuen Will Services at [email protected] or call 9160 7855

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