Chargeability to UK IHT, for example, depends on where a person is domiciled or ‘deemed’ to be domiciled. If a person is domiciled or deemed domiciled in the UK, they are liable to IHT on their worldwide assets, wherever these happen to be situated.
Individuals not domiciled in the UK are also liable to IHT, but only on assets actually also situated in the UK.
Domicile is specific to the UK, and does not necessarily correspond with either residence or nationality. It is a concept that cannot be covered in its entirety in an article as brief as this; but hopefully the following introduction can serve as a foundation for those interested in becoming knowledgeable in this tricky area.
UK domiciled and UK deemed domiciled individuals
These individuals will be liable to UK IHT on worldwide assets, so would be well advised to consider planning techniques to minimise the impact.
It is essential to recognise that domicile is a different concept from “deemed domiciled”, which is an IHT concept only, and applies where an otherwise non-UK-domiciled person has been resident in the UK for 17 out of the last 20 tax years.
In order to lose UK domicile status, it is necessary for a person to be domiciled abroad for a period of at least three UK tax years, and demonstrate that they do not intend to return to the UK.
In this respect, they will need to cut all ties with the UK, including, for example, selling property, closing bank accounts and cancelling club subscriptions.
Other actions that reinforce the decision include drawing up a foreign will, and demonstrating a wish to be buried in the new jurisdiction.
Non UK domiciled
In the case of those not domiciled in the UK, the location of their assets is essential in assessing what is included for UK IHT.
There are special IHT rules for establishing the location of an asset. The relevant moment is when the “transfer of value” occurs. This includes death.
For example: land, buildings or leases over them are located where the land is situated; bank accounts are located where the bank or branch holding the account is situated; and the location of registered shares and securities depends on where they are registered or traded.
Debts owed to the deceased are where the debtor is at the time of the transfer or on death. Chattels and personal possessions are where the item is situated at the time of the transfer or at the date of death.
In the case of insurance policies, it is the location of the issuer of the policy, unless it is issued under seal, in which case it is where it is physically located.
The position with certain UK government securities is that if the transferor was not ordinarily resident in the UK at the date of the chargeable event, then those that are exempt from tax are also treated as excluded property.
From this, it emerges that in relation to anyone not domiciled in the UK, one consideration may be to minimise the value of assets located in the UK.
Against this background, it is noteworthy that the ownership of land and buildings in the UK is common among expatriates and wealthy individuals from all over the world.
It is also relatively common for such property to be let, in which case the rental income will be assessable to UK income tax.
In addition, however, since the property is immovable and situated in the UK, it can be challenging to find a solution minimising exposure to IHT. One consideration might be to mortgage the property, thereby reducing the value physically present in the UK for IHT.
This would depend on the availability of mortgage finance, which cannot be taken for granted in the current environment.
If the assets situated in the UK are movable (for example, a painting or valuable jewellery), the non-domiciled person may wish to consider removing them before a “chargeable event” (such as making a gift) occurs.
It should also be noted that if the value of assets located in the UK is below £325,000 (the value of the nil-rate band during tax year 2011/12), there will be no IHT exposure as matters currently stand.
Tax wrappers and IHT
Finally, it is also important to recognise that assets held within tax wrappers designed to be efficient for other UK taxes may not necessarily be efficient for IHT purposes.
For example, ISAs have no particular IHT advantages, and nor do pensions per se.
However, certain steps can improve IHT efficiency. Where a pension is not drawn, an individual might opt to leave the assets directly to a family member. In this way, the proceeds would not form part of the deceased’s estate, and would not therefore be assessable to IHT.
Conclusion
The concept of domicile is particular to common law jurisdictions, including the UK. Other jurisdictions use different connecting factors in order to tax individuals. Instead of domicile, for example, in other jurisdictions, the connecting factor might be a person’s residence, nationality or citizenship.
This can cause complex cross-jurisdictional conflicts.
It is, therefore, always important that individuals concerned about IHT planning always obtain appropriate advice.
Graeme Stenson is private tax specialist at Kleinwort Benson
