Obtaining UK Non-Domicile Status
An elderly UK national, Mr. Q, has been living in Australia for 20 years and has a worldwide estate (mostly sited in Australia) valued at £1 million.
Many UK nationals live under the misapprehension that because they live outside the UK they are no longer subject to UK Inheritance Tax (IHT). Wrong! Any UK-domiciled individual (generally someone born in the UK), irrespective of their residence,retains their UK domicile
(known as domicile of origin) until death or until the UK Revenue agree otherwise. The rate of IHT is 40% of the amount by which the total value of their worldwide estate exceeds £263,000
Mr. Q considers himself to be Australian but he has retained his UK nationality and passport for sentimental reasons. Certainly he is tax resident in Australia, and neither resident, nor ordinarily tax resident, in the UK. But Mr. Q may well still be subject to 40% UK IHT. At the current valuation of £1 million, and after subtracting the first £263,000 that would be exempt from UK IHT, Mr. Q's estate would be subject to a £294,800 tax demand.
To avoid this possibility, Mr. Q should take steps to convince the UK Revenue that he is not domiciled in the UK. Legally, Mr. Q must satisfy the UK Revenue that he has left the UK, has no intention of returning to the UK to live (temporary visits are not a problem) and has established a permanent home abroad. The UK Revenue will want to see evidence, which should include:
- Purchase of a house in the new country
- Taking steps to be become a national/permanent resident of the new country
- Long period (seven to ten years) of residency abroad
- Establishment of business and other financial ties with the new country
- Severance of business ties with the UK.
This is not an exhaustive list and other indicators would assist. As with many Revenue departments around the world, the UK Inland Revenue will not give advanced rulings and it is therefore only possible to test a UK domicile, or lack of one, by filing a relevant return in the UK. For persons resident outside the UK, this is achieved by making a "chargeable transfer". Under current rules this is most easily done by setting up a discretionary trust and transferring into it an amount in excess of the lifetime and annual exemptions, we suggest £285,000. This will produce a lifetime IHT equal to 20% of the excess value transferred (e.g. the nil rate band of £263,000, plus the annual exemption of £3,000 and the £3,000 unused annual exemption in the previous year brought forward, to give £269,000. Chargeable value transferred is therefore £16,000 and tax bill is 20%, or £3,200 if non-domicile status is not agreed. If, however, the UK agrees that the transferor was not UK domiciled at the time of transfer, there will be no tax bill issued and the Revenue will confirm that this person was not domiciled in the UK at the time of transfer.
People who have lived abroad for many years often decide not to make an application, either because they believe themselves to be safe from tax or because they believe that the UK Revenue will not trouble their heirs or their estate upon their death on the grounds that they will not be aware that they have died.
This is not prudent. In these days of increasing exchange of information, it is unlikely that anybody of substantial wealth can pass away abroad without his or her home country or country of origin getting to hear about it. Failure to take steps to mitigate UK IHT will greatly impact on the value left to the heirs.
Even if the deceased is subject to IHT in his new country of residence, without planning appropriately, he may also pay IHT on the same assets back in the UK. A double charge to IHT could wipe out the entire estate.
Getting a ruling on domicile is an insurance policy. You may think you are not domiciled but if the Inland Revenue disagrees, you may not be around to argue the point and your estate and heirs may lose out. The procedure is relatively straightforward and, even if the Revenue decide you are still domiciled, a ruling will be helpful in deciding what to do next. Planning without certainty on the domicile issue can be a disaster.