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UK Inheritance Tax – The Domicile Trap

According to the latest survey conducted by a leading legal firm in the UK, over 70% of survey participants stated that their biggest financial concern is around the potential exposure to inheritance tax (IHT). Protecting gifts and inheritance to children or grandchildren from their partners or spouses if things go wrong was also high on the list of worries, with nearly half (42%) citing this as a concern. An equal number of people also highlighted being able to gift assets to loved ones but ensure they have enough funds for their own needs as an issue*.

As a British Expat in Hong Kong, you might be thinking about how UK IHT rules affect you, especially when considering a move back to the UK. In this article, we summarise what liabilities you should be aware of.

How Domicile Affects Inheritance Tax in the UK

What does it mean to be UK-domiciled or non-domiciled?

An individual is domiciled in the UK if they ‘belong’ in the UK and it is their home. This is usually established through their parents’ (usually father’s) domicile at the date of the individual’s birth, known as ‘domicile of origin’; or by making the UK their permanent home and renouncing their native land. This last possibility is generally referred to as a ‘domicile of choice’, but that term perhaps understates the difficulty of making such a change: it is not a matter just of deciding, but of carrying through that decision in one’s style of life.

Deemed Domicile

There is a further layer known as ‘deemed domicile’ which is based upon how many years you are resident in the UK. Even if someone does adopt a domicile of choice outside the UK, it can take them up to four years to lose their UK domicile for inheritance tax purposes. HMRC may treat them as UK-domiciled if they:

  • were UK resident for 15 of the last 20 tax years
  • return to Britain for more than a year (if the UK was their domicile of origin and place of birth)

Global Diversification

Domicile and Inheritance Tax

UK domicile and IHT

If you are deemed as UK domicile, UK IHT will be imposed on your global estate and all of your assets. This means that you will still be responsible for paying IHT on your global assets even if you are not a UK tax resident for 30 or 40 years.

If you leave your beneficiaries more than £325,000, the UK IHT liability might reach 40%. However, a tax-free £175,000 “family home allowance” can help reduce the impact.

Non-UK domicile (non-doms) and IHT

As a non-dom, your exposure to UK IHT is restricted to your UK assets only. The average tax-free allowance for UK assets is £325,000 plus a £175,000 “family home allowance.” The 40% UK IHT liability won’t apply to any assets kept outside of the UK, which can be quite advantageous.

Did you know that owning a property in the UK can make you liable for inheritance tax, regardless of your citizenship and residency status?

Many non-UK nationals are unaware of this, which can have significant financial consequences for their loved ones.

It’s crucial to be informed of any additional taxes that may be owed elsewhere. Keep in mind that non-doms relocating to the UK can become UK citizens by choice or after living there for 15 of the previous 20 years, whichever comes first. This means that long-term preparation will be necessary.

And keep in mind that you are often viewed as UK domicile if you are classified as a resident in the UK for tax purposes even if you previously had a domicile in the UK but switched to a domicile of choice outside the UK.

Here are some additional things to keep in mind:

  • The rules around domicile can be complex, so it is important to seek professional financial and tax advice.
  • Your domicile status can change over time, so it is important to review your situation regularly.
  • There are a number of factors that can affect your exposure to IHT, including your nationality, residency status, and the assets you own.
  • There are a number of ways to mitigate your exposure to IHT, such as: Making gifts, structuring ownership through trusts or companies, getting life insurance policies to cover potential tax liabilities, interest only mortgages, and simply planning your estate carefully.

Developing a comprehensive plan suited to your unique assets, residency, and domicile status is the best way to reduce your exposure to IHT and that of your heirs. If you are concerned about your exposure to IHT, it is important to speak to a financial planner who can help you understand your options and plan accordingly.

Contact us today to learn more.



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