Author
Whilst the concept of domicile has been abolished for most UK tax purposes, it still plays an important role in determining succession (who receives assets on death) and can still provide valuable relief from UK Inheritance Tax for those lucky enough to benefit from an applicable treaty.
The UK has Inheritance Tax treaties with the following countries: France, India, Italy, Pakistan, Ireland, the Netherlands, South Africa, Sweden, Switzerland and the USA.
Some of these treaties offer very significant benefits, which can result in part of an individual’s estate escaping Inheritance Tax on death, despite the individual remaining a long term resident of the UK. Currently a long-term resident would need to cease UK tax residence for 10 years in able to replicate the same beneficial tax treatment. Not all the treaties operate in the same way, so specific advice is required. This advice should cover the planning required during lifetime to optimise the benefits of treaty protection.
The India UK Treaty can enable UK resident individuals domiciled in India to protect their non-UK assets from Inheritance Tax on death. To benefit from this Treaty, individuals require English law and Indian law confirmation on their domicile (which must be relate to a region in India), and both a UK Will and foreign law Will is usually required. As the English law on domicile has developed over decades of fact specific cases, rather than defined by legislation, appropriate legal advice is essential to take advantage of the relief available.
In contrast The US UK estate tax treaty can provide significant benefits in more limited circumstances. One example is the option for a US domiciled individual (who is not a UK citizen) to establish a trust that is not subject to Inheritance Tax charges, even if they subsequently become domiciled in the UK. This relief does not apply to all assets but is nevertheless valuable considering the current less generous Inheritance Tax regime relating to trusts.
Another example relates to the current low US estate tax exemption for non-US domiciled individuals of $60,000. There are many UK domiciled citizens who personally hold US investments worth more than $60,000, without having any other connection to the US. They may be unaware of the US estate tax liability that would be due on their death, if no action is taken. Whilst a structure could be used during lifetime to avoid this situation, a Treaty claim could also be made on death which would allow them to benefit from the substantial US estate tax exemption available to US citizens (currently worth $13.99 million).
We strongly recommend using an advisor who is familiar with these treaties (and the practical approach taken by HMRC) to ensure opportunities are not missed. The relief under inheritance tax treaties is not automatic, and so it is important that an individual’s chosen executors are aware of the planning and which advisor to contact to assist.
It is important therefore that with the abolishment of the remittance basis, individuals do not abandon all steps they have may have previously taken in respect of their domicile position. Even for individuals not seeking to rely on an Inheritance Tax Treaty, there remains a risk of HMRC retrospectively looking at claims for the remittance basis for those individuals who remain in the UK and fail to keep up their ties to their foreign domicile.
We can guide individuals through the options available for Inheritance Tax planning as well as review existing plans in light of significant recent and forthcoming UK tax changes.
Should you wish to discuss any of the issues raised in this article, please contact Dhana Sabanathan.
Author