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Inheritance Tax and domicile

Domicile is a general legal concept which in basic terms is taken to mean the country where you permanently belong. However, determining domicile status can be complex. HMRC guidance states that domicile cannot be defined precisely, but the concept rests on various basic principles.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, many factors are considered, for example, the location of family, property and business interests.

There is also a concept in the UK of deemed domicile whereby under rules introduced from 6 April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years, will be deemed to be domiciled in the UK for tax purposes. This would make them liable to Inheritance Tax (IHT) on their worldwide assets.

IHT is generally chargeable to people domiciled (or deemed domiciled) in the UK or with assets sited in the UK. For example, HMRC’s manual states that if someone creates a settlement with assets outside the UK, when they are not domiciled in the UK, the settlement could be excluded from the charge to IHT. There are also many double tax agreements that can, depending on the circumstances change a person's liability to IHT.

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Gifts with strings attached

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

  • 0 to 3 years before death 40%
  • 3 to 4 years before death 32%
  • 4 to 5 years before death 24%
  • 5 to 6 years before death 16%
  • 6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. If this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to inheritance tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted. We would be happy to help you understand what options are available to reduce your liability to inheritance tax whilst at the same time protecting your assets.

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IHT and foreign property

If a permanent home (domicile) is in the UK then any foreign situated property owned at date of death will be chargeable to Inheritance Tax. The site of an asset is usually the place where the asset in question is considered to be located for legal purposes. The site of immovable property is the place or country where the property is situated.

Certain assets are excluded from the charge to Inheritance Tax if the taxpayer was not domiciled in the UK at the date of the transfer, regardless of where the assets are. Any claim to Inheritance Tax can be affected by the way assets outside the UK devolve, even when the taxpayer is domiciled in the UK. For example, the foreign country may have different legal rules for property held jointly or on trust.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, many factors are taken into account, for example, the location family, property and business interests. There is also the UK concept  of deemed domicile, whereby under new rules introduced from 6 April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years will be deemed to be domiciled in the UK for tax purposes.

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What is business relief for Inheritance Tax purposes?

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. Currently, no tax is payable when a person’s estate is worth £325,000 or less.

Certain business assets may be exempt

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who had died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

  • 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
  • 50% Business Relief can be claimed on:
    – shares controlling more than 50% of the voting rights in a listed company
    – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
    – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example, if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

The question of whether or not Business Relief is available can be complex and we would recommend that business owners pay attention to the facts to ensure their descendants IHT bill is as low as possible. We can of course help review the facts and advise accordingly.