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Domicile for inheritance tax purposes

Q. Why is domicile important for inheritance tax purposes?

A. Individuals domiciled in the UK are liable to UK inheritance tax on their worldwide assets whereas for non UK domiciles the liability arises only on UK situated assets.

Q. How is the domicile determined?

Under the English concept of domicile this can be either;

 - Domicile of origin - Imposed on every person at the moment of their birth.

 - Domicile of dependence - Children under 16 cannot have an independent domicile of choice.

 - Domicile of choice

Q. How is a person's domicile of origin established?

A. The basic rule, for children born legitimately during their father's lifetime, is that the domicile of the father at the time of the child's birth is imposed on the child. The starting point is to establish the father's domicile at the time of birth, which could be a domicile of origin, or subsequently acquired domicile of choice.

Q. What are the more specific rules related to a domicile of origin?

A. - Where a child is born either illegitimately or legitimately after the father's death, the domicile of origin imposed on the child is that of the mother at the time of birth.

 - An adopted child acquires a domicile of origin based on his adoptive father's domicile at the time of adoption, or if there is no adoptive father, the domicile of the mother.

 - Since 4 May 2006 different rules apply to a child born in Scotland; where the child's parents share a domicile and the child has a home with either or both of them, his or her domicile is the same as the parents. Where the child shares a home with neither parent, or the parents have different domiciles, the child is domiciled in the country with which he or she has for the time being the closest connection.

 - For women married before 1 January 1974, they retain their husband's domicile as a domicile of choice if it is not also their domicile of origin unless and until it is changed by acquisition or revival of another domicile. Women married after 31 December 1973 have their domicile determined independently of their husband.

Q. How does one give up a domicile of origin and change to a domicile of choice?

A. This involves not only residing in a different country but showing intention to make that country the individual's permanent home. What "intention" in this context means has been discussed in a number of cases, while HMRC's view is set out in RDRM (Residence, Domicile and Remittance Basis Manual) 23050. The manual makes reference to if there is any clearly foreseen or reasonably anticipated contingency upon the occurrence of which the individual will leave the territory concerned. The existence of such a contingency indicates there is no intention to remain indefinitely in the territory. RDRM 23080 summarises the information and documents HMRC consider may be relevant in a domicile enquiry. One example of an intention to establish a permanent home in the past may have been location of burial plot, but this is not included in RDRM 23080. A burial plot could be argued to indicate not that an individual wishes to continue to live in a territory but only where their remains are to reside after death.

Q. What happens when a domicile of choice is given up?

A. The individual's domicile automatically reverts to their domicile of origin until a new domicile of choice is obtained. This can have implications for Inheritance tax if when giving up a domicile of choice there is a delay before the individual establishes a new domicile of choice. If the individual were to die in the delay period, for example when spending a year travelling before establishing a new home, then it will be the domicile of origin that is relevant for Inheritance Tax purposes.

Q. What is deemed domicile?

A. If an individual is domiciled in the UK when they leave this country they are deemed to remain domiciled here for IHT purposes for three calendar years from the date of departure. Deemed domicile also applies to individuals who have been resident in the UK for 17 out of the 20 years of assessment ending with the year in which a transfer of value takes place. In particular this applies where a transfer is made in the 17th year. Residence here is determined under the income tax rules and a good summary of the current rules is contained in the July 2013 edition of Tax Talk. The position on deemed domicile is complicated where the individual concerned has died and is deemed domiciled in the UK under the above rules but domiciled in France, India, Italy or Pakistan under general law. These countries all have pre 1975 double tax treaties with the UK and the result is that the deemed domicile provisions do not apply to transfers on death. However, the terms of the treaty are ignored if the disposition giving rise to the charge to tax is governed by British law. Accordingly a disposition under a British will would negate the effect of the treaty, again subject to a proviso that this may not be the case if the overseas property is land.

Example

Giovanni has been continuously resident in the UK for income tax purposes since 1985 and so is a deemed domicile for inheritance tax purposes. He owns a villa in Sicily, a flat in Mayfair and has portfolios of quoted shares in both the UK and Italy. He has put in place a UK will to deal with the UK assets and an Italian will to deal with the Italian assets. He dies in the UK in June 2013. The effect of the double tax treaty is to negate the deemed domicile rules so that only the UK assets can be charged to UK inheritance tax.

Q.  What are the special rules where there is a non domiciled spouse?

A.  These were changed significantly in 2013 and a good summary of the current position is contained in the May 2013 edition of Tax Talk under the Inheritance Tax Changes section.

Francis Whitbread, Tax Partner at Edmund Carr LLP, a UK200Group tax panel member firm, 01245 261818

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