In the realm of wealth management, understanding domicile is paramount for devising strategic plans to mitigate potential tax burdens. Domicile is not solely a matter of residence; rather, it reflects an individual’s permanent home, a nuanced concept involving both physical presence and a demonstrated intention to reside indefinitely in a particular jurisdiction.
For UK-based accountants, navigating the intricacies of domicile is crucial in crafting bespoke IHT strategies.
How domicile status affects an individual’s liability
Deemed domicile holds particular significance for individuals with international assets. In April 2017, pivotal changes were introduced, reshaping the criteria for determining deemed domicile status – read more about what deemed domicile means and how it is defined in our previous blog.
Individuals deemed domiciled in the UK are subject to IHT on their global assets, meaning that international holdings are included in the taxable estate. This includes properties, investments, and personal possessions, wherever they might be located in the world.
It may be worth checking with your accountant if you can take advantage of any of the double tax treaties which the UK has in place with a number of countries.
For IHT purposes, an individual is deemed domiciled in the UK if they were domiciled in the UK in at least 15 out of the 20 tax years immediately before the relevant event (usually the date of death).
Be aware that you can lose deemed domiciled status if you leave the UK and there are at least six tax years as a non-UK resident in the 20 tax years before the relevant tax year.
Impact on IHT for international assets
Proper estate planning takes on heightened significance for individuals with deemed domicile status in the UK, given the far-reaching implications of IHT on their global assets.
Strategic measures, such as establishing trusts and utilising available exemptions, become essential tools in mitigating the impact of IHT.
As trusted advisers, Libra Wealth Management can play a pivotal role in guiding clients through these complexities, tailoring strategies to individual circumstances.
Strategies for mitigating IHT on international assets
For individuals with deemed domicile status in the UK, minimising IHT liability demands a strategic and informed approach. Keeping a meticulous record of international assets and their values is crucial for accurate estate valuation.
Capitalising on available exemptions and reliefs can help to optimise the tax position. Some of the options we would discuss with you could include:
Lifetime gifts: The UK allows potentially exempt transfers (PETs), which exempt lifetime gifts from IHT, provided the giver survives seven years from the date of the gift. It’s a significant way for individuals to reduce the size of their taxable estate. PETs can be any transfer of value, including money, property, or possessions.
Annual exemptions: Regardless of domicile status, in the UK, every individual has an annual exemption of £3,000 for gifts. This means you can give away assets or cash up to a total of £3,000 in a year without incurring IHT. If you don’t use all of your £3,000 exemption in one year, you can carry the remainder forward to the next year, but this can only be used for that year.
Other exemptions also exist, including for small gifts of up to £250 per person; wedding gifts, with varying amounts according to your relationship with the recipient; and regular gifts out of income, which must form part of your normal expenditure and mustn’t affect your standard of living.
Life insurance: Whole-of-life insurance policies can be a strategic tool to cover potential IHT liabilities. These policies are ‘in trust,’ meaning the payout from the policy does not form part of the estate and is therefore not subject to IHT. The beneficiaries can use the proceeds to pay any IHT due, alleviating the burden of tax payment.
Trusts: Trusts shift the legal ownership of the assets, potentially reducing the size of the taxable estate. However, UK laws have specific anti-avoidance provisions for trusts set up by UK domiciliaries or deemed domiciliaries. Thus, advice should always be sought before setting up a trust.
Spousal exemptions and Transferrable Nil Rate Band: Transfers of assets between spouses or civil partners living in the UK are often exempt from IHT. The same transfers might not be equally tax-efficient for couples where one or both partners are non-UK domiciled. However, there are strategies to maximize the Transferrable Nil Rate Band and other IHT reliefs.
Business Property Relief (BPR): Investing in assets that qualify for Business Property Relief (BPR) can be an efficient way to mitigate IHT. Qualifying businesses can attract IHT relief at rates of 100% or 50% after they have been held for two years. These investments are higher risk but can dramatically reduce the IHT liability.
Agricultural Property Relief (APR): APR can provide 50% or 100% relief from IHT on the agricultural value of qualifying farm property, including land, buildings, and farmhouses.
Pension contributions: Pensions can be a highly tax-efficient part of an estate. Under current law, pensions can generally be passed to beneficiaries without counting toward an estate for IHT purposes. Importantly, not all pension schemes or individual circumstances will necessarily enable the IHT benefits.
Non-UK situs assets: Individuals not deemed domiciled can avoid IHT on non-UK assets. For those not deemed domiciled, only their assets located in the UK are subject to IHT. Assets situated outside the UK escape the IHT scope, representing a significant advantage for these individuals.
All these details depend on current UK law and practice, and everyone’s circumstances differ. As regulations alter, tax planning is not a one-time action but an ongoing process, requiring periodic assessment and adjustment.
With over 20 years of experience helping international clients with their tax affairs, at Libra, we’ll talk through your international tax questions in the context of your wider personal financial and tax position, and work with you to develop a plan in line with your goals.
Talk to us about international tax and your inheritance tax planning.
This is a complex area of tax and we will be publishing a future blog that focuses on the impact changes to the Finance Act in 2017 have had on individuals whose domicile has changed.
Meanwhile, you can read more in our blog series which will include topics such as:
- How does domicile impact my UK tax status?
- Pre-immigration tax planning – segregation of income and capital;
- Moving to the UK to set up a business;
- The importance of wills;
- Tax-advantaged savings and investments.