Inheritance Tax & Domicile – What You Need To Know

The ever-changing scope of inheritance tax planning can be very onerous for individuals to keep on fully informed on.

A key development this year was the introduction of the first tranche of the residential nil-rate band (NRB) of £100,000 on 6 April 2017, and subject to further increases up to £175,000 by 6 April 2020.

Not only does this require careful planning in relation to drafting wills but also an exceedingly complex array of detailed scenarios present themselves to individuals as they grapple with the most efficient and approved way to contain the tax burden.

While there are a number of IHT tax planning exercises that can be undertaken to reduce this liability around the nil-rate bands, sometimes the only thing to do is to mitigate the effects of IHT and arrange for funds to pay the estimated tax bill when it arrives.

An initial simplistic way can be arranged effectively with an insurance joint life second death life policy written into trust. The funds will be immediately available upon the second death, without probate delay. This allows the executors to pay the IHT, obtain probate and distribute the estate intact.

There is also an attraction of gifting to future generations as a popular way for estate reduction for UK domiciles, where the smaller the estate, the lower the IHT liability in the future.

“However, gifts up to the NRB are still deemed to be in the estate for IHT calculations for seven years. For someone that gifts up to the NRB, there is a potential IHT saving of £130,000 but only after seven years.

A simple seven-year level term life insurance policy, written into trust, to cover this £130,000 liability in the meantime will ensure the full value of the gift is maintained.

Domicile is key

The general rule in relation to inheritance tax liability is that if a person is domiciled in the UK, all of their assets are within the scope of this tax, which is charged at the rate of 40%.

However, if they are not UK-domiciled, a so-called ‘non-dom’, only their UK assets are covered by UK inheritance tax.

Alex Ruffel, partner at international law firm Irwin Mitchell Private Wealth, says: “The meaning of ‘domicile’ deserves an article on its own but, in essence, a person is domiciled in the jurisdiction that is their permanent home, regardless of their citizenship or place of current residence.

“There is also a special deeming provision. If a non-dom has lived in the UK for 15 out of the past 20 consecutive tax years, they are deemed domiciled in the UK for tax purposes.”

But while this is an issue faced by many long-term UK resident non-doms, a lucky few escape it due to the continuing existence of tax treaties between the UK and certain other countries that predate the deemed domicile rules and effectively override them.

Ruffel explains that there are only four such treaties – with France, Italy, India and Pakistan – but they are extremely valuable.

Each of the treaties between the UK and the other four countries is slightly different but she lists some key points for those wish to take advantage of them:

Domicile is key – a person who wishes to use one of the four treaties must maintain their non-UK domicile under the general law;

Be wary of using UK wills to cover non-UK assets – provisions in the UK/Indian treaty, for example, mean foreign assets could still be IHT taxable in the UK if they are subject to will governed by the law of part of the UK;

Avoid bringing assets into the UK unnecessarily – assets in the UK do not qualify for favourable inheritance tax treatment under the treaties;

Be aware that treaties can change – the four described above are clearly generous and there may be a renegotiation at some point.

What is the Next Step?

We are able to assist and we will be able to answer any questions you have and advise you on the best way to proceed, in what can be a hugely complex planning area.

Contact us today and one of our experienced advisors will be happy to assist.

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