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.