Debunking Domicile And Inheritance Tax – Annelise Tyler

Domicile is a misunderstood concept largely because by its very nature it is subjective and therefore ambiguous.  However, it is essential to establish a deceased’s domicile, as this affects the taxation of their estate.

Broadly speaking domicile is a person’s permanent, principal home and usually where they have lived physically at some time, albeit they may not live there currently.

Domicile is viewed less subjectively for tax purposes and confusion can arise when a person considers themselves domiciled in one country, but for tax purposes they are considered domiciled in another. Domicile can be split into two categories, personal domicile and domicile for tax purposes.

PERSONAL DOMICILE

Personal domicile is largely subjective and can change during the course of a lifetime.

At birth a person has a domicile of origin which is usually the country in which they are born or that of their father’s domicile, if different.  During a person’s lifetime, they can acquire an alternative domicile. For example, if the domicile of origin is the UK but a person moves abroad with the intention of staying there, then they reject their domicile of origin and acquire a domicile of choice.

It is possible however to retain a domicile of origin whilst living abroad for an indefinite period of time.

DOMICILE FOR TAX PURPOSES

For tax purposes in the UK, domicile is considered slightly differently. Aside from being a UK domicile there are two further categories of domicile where tax will apply:

1. Deemed Domicile which applies to anyone whatever their domicile of origin or domicile of choice who was living in the UK at the relevant time and has lived in the UK for 15 of the previous 20 years ending with the relevant date (i.e death).

1. Formerly Domiciled where the individual had a UK domicile of origin and has since acquired a domicile of choice and is currently living in the UK and has done in at least 1 of the previous 2 tax years. This is irrespective of whether their domicile of choice is retained.

IHT AND SPOUSAL/CIVIL PARTNER EXEMPTION

Domicile plays an important part in assessing whether spousal/civil partner exemption applies (for brevity the term spouse in this context includes civil partners).

The general rule is that all gifts made during the lifetime and on death between spouses are wholly exempt from Inheritance Tax (IHT).  For gifts between non-domiciled spouses and gifts from non-domiciled spouses to domiciled spouses, the exemption applies only in relation to UK assets.

The exception does not apply to gifts from a UK domiciled spouse to a non-domiciled spouse.  In this case, there is a single exemption capped at £325,000 in addition to the Nil Rate Band (NRB) (currently up to £325,000), giving a total exemption of up to £650,000 over the worldwide assets. In respect of lifetime gifts, unlike the ordinary NRB which refreshes every 7 years, the further spousal exemption, which is used up first, does not. Therefore, any reduction of the first £325,000 as a result of a lifetime gift remains for life. Once it’s gone – it’s gone.

A non-domiciled spouse can elect to become UK domiciled for up to 2 years after their spouse’s death. Careful consideration should be taken before making such an election, as all worldwide assets become potentially exposed to IHT, and such an election is irrevocable whilst still resident in the UK.

Currently, the tax regime in this respect favours non-domiciles over UK domiciles but with a change in government virtually certain in the next year, we can expect this to change.

The above comprises a broad overview of the concept of domicile and does not constitute advice, as much will depend on individual’s circumstances.

If you would like advice on how domicile is likely to affect you and your estate, please contact one of our expert solicitors on 01892 510 222 or email info@bussmurton.co.uk