What’s domicile? And why does it matter?

18th Dec 2013
The question of domicile is fundamental to how a person’s worldwide assets are taxed in the UK during their lifetime and on their death. ...
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What’s domicile? And why does it matter?

18th Dec 2013

Guest Article by Louise Battison, Chartered tax Adviser with Tax Perspective

The question of domicile is fundamental to how a person’s worldwide assets are taxed in the UK during their lifetime and on their death. It is particularly important that the issue of domicile is considered whilst the client is alive and able to arrange their financial affairs tax efficiently.

A person domiciled in the UK is subject to inheritance tax (IHT) on their worldwide assets. A person who lives in the UK but is not domiciled here will only be subject to UK IHT on their assets situated in the UK.

Sometimes it is easy to make assumptions about a person’s domicile position but because of the complexities of law those assumptions may not be correct.

“A common belief is that a person’s domicile is simply based on where they live or where they where born but this is not always the case.”

A child usually obtains their domicile from their father, regardless of where the child is born or lives. A child born in the UK to a father domiciled in India will have a domicile of origin in India. However, if the father changes his own domicile before the child reaches the age of 16 then the child’s domicile also changes.

Therefore, you may find you have to establish your client’s father’s domicile before you are able to establish your client’s domicile with any degree of certainty.

However, to counter potential tax avoidance HMRC have a concept of ‘deemed domicile’. If an individual is in the UK for 17 out of 20 tax years HMRC will deem them as domiciled in the UK and their worldwide estate will be subject to UK tax.

This means it is usually difficult to do any IHT planning based on a person being non UK domiciled if they have been in the UK for 17 or more of the last 20 years.

A few countries, including India, Pakistan, France and Italy, have double tax treaties with the UK that were written before ‘deemed domicile’ was introduced. The treaties with India and Pakistan offer the most scope for effective IHT planning and you don’t need to have been born there to make use of this.

If your client has lived in the UK for many years but their father was domiciled in India or Pakistan and they can illustrate that they don’t have any permanent intention to stay in the UK, you could save them a considerable amount of money through effective estate planning.

Importantly they must have an English Will for their UK assets and a non-UK Will to ensure their non-UK assets don’t pass through the UK Will. This must be done correctly and professional advice should be taken to ensure that one Will is not revoked by the other.

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When is a pound worth 60p?

1st May 2013
In George Osborne’s most recent Budget further provisions were made to prevent Inheritance Tax avoidance schemes. ...
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When is a pound worth 60p?

1st May 2013

When you needlessly pay Inheritance Tax (IHT)

In George Osborne’s most recent Budget further provisions were made to prevent Inheritance Tax (IHT) avoidance schemes.

In many ways this helps to reinforce false perceptions; that to reduce your IHT liability you need complicated schemes that will be scrutinised by HMRC.

But for many this can’t be further from the truth. There are plenty of options for standard IHT planning before you need to think about complex and aggressive solutions.

We often come across clients in later life with assets over the IHT band and good incomes that they are saving. But for every extra pound they save they only save 60p i.e. their eventual beneficiaries will be giving 40p to HMRC in IHT!

For these clients gifts out of income are an excellent way to minimise IHT – and one that is often over looked.

But what is classed as ‘income’? And what criteria will HMRC apply when accepting gifts out of income?

  • Normal income includes salaries and pensions – plus interest, dividends and investment income (including rental income and annuities).
  • The gift must be out of normal income and MUST leave the person fully able to maintain their usual standard of living, including luxuries such as holidays
  • The gifts must form part of a regular pattern or provide proof of a commitment (for example, the first payment of a life assurance policy).
  • HMRC will generally accept the expenditure as ‘normal’ if it happens three or more times.
  • Often mis-understood – the gift doesn’t need to be the same amount to the same person – it just has to be of a similar nature. For example, ‘every year I give 50% of my surplus income to family members.’

Gifts out of income are extremely valuable as there is no maximum amount (as long as they fit within the above criteria). They can provide substantial IHT savings and are simple – but they MUST be done correctly and well documented to ensure they don’t form part of HMRC ‘s IHT calculations.

Pavilion Row are specialists in Wills, probate and trusts. If you have any queries regarding the above or would like to understand more about how decisions made now affect what happens in probate please feel free to contact us.

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Budget 2013: Changes to the inheritance tax (IHT) nil-rate band are confirmed

21st Mar 2013
It was announced yesterday that the nil-rate band for IHT will be frozen until 2017/18. ...
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Budget 2013: Changes to the inheritance tax (IHT) nil-rate band are confirmed

21st Mar 2013

The Government announced in the budget yesterday that the tax-free nil-rate band for IHT, which currently stands at £325,000 (£650,000 for married couples & civil partners), will be frozen until 2017/18. This supersedes their announcement in the Autumn Statement last year that increased the level to £329,000 in 2015/16.

In addition the Chancellor announced plans to further stamp down on IHT avoidance schemes. HMRC will change the existing treatment of liabilities, setting new rules on when deductions would be allowable or restricting the deduction altogether so as to avoid any possible tax advantage. This measure is in support of the government’s anti-avoidance strategy.

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IHT nil rate band may now be frozen until 2019

12th Feb 2013
It is now being reported that the government will freeze the IHT threshold. ...
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IHT nil rate band may now be frozen until 2019

12th Feb 2013

Despite Chancellor George Osborne’s Autumn Statement pledge to raise the inheritance tax (IHT) threshold by 1% – to £329,000 for individuals and £658,000 for couples – in 2015/2016. It is now being reported that the government will freeze the IHT threshold – at £325,000 for individuals and £650,000 for couples – until 2019.

The extended freeze is expected to part-fund the government’s plans for a cap on elderly care fees.

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Inheritance Tax – Holiday lets are entitled to business property relief, ruling reversed

5th Feb 2013
HMRC has successfully appealed the decision. ...
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Inheritance Tax – Holiday lets are entitled to business property relief, ruling reversed

5th Feb 2013

Further to our news story in February 2012, HMRC has successfully appealed the tribunal’s decision in which a holiday lettings business was granted business property relief from inheritance tax.

The original tribunal ruled that a holiday let was too active an operation to be an investment and must be regarded as a business asset.

The Upper Tribunal has now reversed this, accepting HMRC’s argument that the business was ‘mainly’ one of holding the property as an investment. The business is therefore not entitled to any relief from inheritance tax.

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IHT nil rate band set to rise

6th Dec 2012
George Osborne revealed in his Autumn statement that the tax free nil-rate band for inheritance tax (IHT) will increase in year 2015/16. ...
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IHT nil rate band set to rise

6th Dec 2012

George Osborne revealed in his Autumn statement yesterday that the tax free nil-rate band for inheritance tax (IHT) will increase to £329,000 in year 2015/16.

The current nil-rate of £325,000 has been in place since 2009.

The increase in the nil-rate band means that as of 2015/16 a married couple/civil partnership will be able to leave £658,000 before IHT is payable.

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Give to charity and the tax man pays!

17th Sep 2012
Today sees the start of ‘Remember a Charity Week’ which seeks to bring awareness about the importance of charitable gifts in Wills. ...
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Give to charity and the tax man pays!

17th Sep 2012

Give to charity and the tax man pays!

Pavilion Row is a supporter of ‘Remember a Charity’. Today sees the start of ‘Remember a Charity Week’ which seeks to bring awareness about the importance of charitable gifts in Wills.

Did you know that whilst 75% of people give to charity in their lifetime only 7% leave anything in their Will?

Following recent changes to inheritance tax (IHT) it is worth remembering when giving to charity there are tax advantages now available. If you plan to give 4% of your net estate to charity you can increase the gift to 10% without reducing the amount of inheritance the other beneficiaries receive. The tax man pays the difference!

From April 2012 IHT is reduced from 40% to 36% for people who leave at least 10% of their net estate to charity. This lower rate can only apply if part of the estate is chargeable to IHT at 40%. For example:


Example 1 Example 2
Net Estate £100,000 Net Estate £100,000
Charity Receives 4% £4,000 Charity Receives 10% £10,000
Remainder to be taxed £96,000 Remainder to be taxed £90,000
Tax at 40% £38,400 Tax at 36% £32,400
Inheritance for other beneficiaries £57,600 Inheritance for other beneficiaries £57,600

 

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Inheritance Tax – Holiday lets are entitled to business property relief, says tribunal

3rd Feb 2012
The ruling states that the let was not an investment. ...
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Inheritance Tax – Holiday lets are entitled to business property relief, says tribunal

3rd Feb 2012

The First Tier Tribunal has rejected an attempt by HM Revenue & Customs to treat a holiday letting cottage as an investment and thus deny it business property relief from IHT.

In a recent case the tribunal ruled that a holiday let was too active an operation to be an investment and no intelligent businessman would treat it as anything but a business asset.

The tribunal found that:

  • The exploitation of the property as a holiday letting cottage amounted to the operation of a business for more than two year before the person’s death.
  • Even though it was not consistently profitable, the business was conducted with a view to gain and therefore satisfied the “for gain” requirement in section 103(3) of IHTA 1984.
  • The business did not consist wholly or mainly of holding investments so as to be excluded from the term “relevant business property” by the operation of section 105(3) of IHTA 1984.

We understand that the HMRC held back a number of other similar cases pending the tribunal’s outcome. Therefore the decision has been widely awaited and will attract considerable interest.

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