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24 | UK Inheritance tax
it applies, it is charged on what a person owns at
the date of his death and what he or she has
given away in the previous seven years. It is also
It is quite possible to be a citizen of
charged on any asset given away at any time since
1986, where the deceased continued to enjoy the
benefit of the property he or she has given away.
one country, a national of another,
Such gifts are called gifts with reservation of ben-
efit. A transfer into a trust during one’s lifetime
resident in a third and still domiciled
can also attract the tax, although the rate then
would be 20% rather than 40%, with a top up to
40% if one does not survive the transfer by seven
in the UK
years.
A major criterion for the application of the tax out of 20 of the last UK tax years (6th April to or deemed domiciled in the UK at the time they
is that it applies to UK property only – unless 5th April). So if Roger Nadal had lived in the UK set the trust up, are excluded from IHT, even if
(and this is a crucial proviso which sometimes within the last twenty years and had not been the Settlor can benefit from the trust and even if
has unexpected results) the deceased or donor non-UK resident (usually judged by the rules he or she subsequently becomes UK domiciled
was “domiciled” or “deemed domiciled” in the applicable for UK income tax purposes) for at or deemed domiciled.
UK. In that case it is charged on all assets world- least four tax years, then his worldwide assets will Other simple steps, such as having one’s bank
wide. still be caught in the UK IHT net on his death. account offshore, will keep the balances out of
These words “domiciled” and “deemed domi- The starting point for calculating the tax when the range of UK IHT unless and until one
ciled” have a deceptively simple ring to them. someone dies is that the first £325,000 of the becomes UK domiciled or deemed domiciled.
Domiciled sounds like residence, so if you are estate is free of tax. The word “estate” includes all There are other steps which can be taken to
not resident in the UK, you may think you are real and personal property and, as mentioned reduce the impact of IHT and other taxes,
outside the scope of the tax, unless you have UK- above, gifts made within the seven years prior to although one should always be aware of the
sited assets. But you might be wrong. death and gifts with reservation of benefit. There impact of any arrangements for any taxes in the
The concept of domicile broadly comes down are exemptions and reliefs where it is a charity country in which you live or of which you are a
to the idea of “home being where your heart is”. which received the gift or legacy. Currently only citizen.
If you are UK domiciled, it will potentially affect UK registered charities benefit from the exemp- If you are not used to a concept of a tax on
not only your tax status, but the rules that apply tion but, as a result of a recent European court death it can be difficult to envisage how it works,
if you die with (or without) a Will, or if you ruling, that is expected to be widened to include and many taxpayers in the UK find the interac-
marry, divorce, or, for example seek custody or some non-UK charities. Gifts or legacies to tion between IHT and CGT (Capital Gains Tax)
adoption of a child. In other words, in UK law spouses are also free of tax, subject to the tax sta- confusing. This is partly because capital gains tax
your domicile is what determines which coun- tus of the couple involved. If you and your (which is broadly a tax on the increase in value
try’s rules for private individuals and families you spouse do not have the same UK tax status in an asset which one has disposed of) can apply
are most closely connected with. advice should be taken to establish the correct to gifts, as well as IHT. So it is possible to pay
In many jurisdictions, that would be deter- position. Gifts to a civil partner under the UK’s both IHT and CGT on the same gift.
mined by your citizenship or nationality. But Civil Partnership Act are treated as gifts to a Another cause for confusion is that it is the tax
domicile is quite distinct from both of those con- spouse but unless the partnership is one regis- status of the person making the gift which deter-
cepts. It is quite possible to be a citizen of one tered under the Act, again advice should be mines whether these taxes apply, and the relevant
country, a national of another, resident in a third taken. tax status is different for the two taxes. For CGT,
and still domiciled in the UK. You start off with a Where the assets are business property (only the relevant criterion is whether you are resident
domicile of origin – based on your father’s domi- trading businesses and not, for example, invest- or ordinarily resident in the UK, whereas for IHT
cile at the time you were born. You can choose to ment companies) or UK agricultural property as indicated above it is all a question of domicile.
change your domicile, and whether you have (again likely to be widened to include some non- Whatever arrangements one makes, taking
done so or not would depend on numerous fac- UK assets) there is some relief from IHT but the timely advice well before you move to, or invest
tors which go to build up a picture of which reliefs are not straightforward or necessarily what in the UK, can make a very significant difference
country you are most closely associated with. one would expect. to your UK tax bill.
So, if, like the fictitious retired tennis champi- So how can you avoid UK IHT if, say, you And it is also worth bearing in mind that a
on, Roger Nadal, you were born in Spain of Swiss want to buy property in the UK to use on an failure to account for tax in the UK is a criminal
parents and you live most of the time in the US, occasional basis? A combination of buying the offence which can bring one under the purview
educate your children there, intend to be buried property through an offshore company and of the stringent anti money laundering regula-
there (when the time is right) but spend two holding the shares in the company in an offshore tions. So getting good professional advice can not
months of every year in UK, you are not likely to trust, is worthwhile to minimise UK IHT, subject only save you tax, but it can also protect you
be regarded as domiciled here in the UK. to the value of the property justifying the from embarrassing and potentially costly mis-
On the other hand, if you were born in the expense of the structure. For lower value proper- takes.
UK you might have to work harder to shake off ties buying it in joint names with your spouse or
your UK domicile of origin. another member of the family can ensure that Susan Midha is a Partner in the Private
And there is also the somewhat sneaky con- the IHT threshold is not exceeded. Client Department of Adams & Remers
cept of “deemed domicile”. This is a concept Or if you are planning to come to live more Solicitors and can be contacted at
which exists only for IHT. It does not apply to permanently in the UK, you can shield your susan.midha@adams-remers.co.uk or
other UK taxes or to family matters or Wills. worldwide assets by putting them into a trust www.adams-remers.co.uk
You can be actually non-domiciled in the UK but before you come. Assets which are not sited in This article is not intended to be a full
still “deemed domiciled” here. And that will hap- the UK and which are in a trust set up by some- summary of the law and advice should be
pen if you have been resident in the UK for 17 one (called the Settlor) who was not domiciled sought on all issues.
June 2009 Investment International www.investmentinternational.com
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