How domicile affects inheritance tax

Domicile and inheritance tax (IHT) – what do I need to know?

Inheritance tax can be a big concern when considering a move to the UK, so we summarise what expats should be aware of when it comes to domicile and inheritance tax (IHT).

Domicile is the key factor that determines your exposure to IHT in the UK. According to the UK tax authorities – HMRC – everyone has a domicile status at every point in their lives. Your domicile is typically acquired at birth and is generally determined by your father’s domicile or homeland. It’s important to note that this status – known as domicile of origin – can be very hard to shake off.

UK domicile

If you have a UK domicile your worldwide estate and all the assets you own anywhere in the world will face UK IHT. You could be non-UK tax resident for 30 or 40 years, but if you’re UK domiciled, you won’t escape that UK IHT charge. And the bill can be significant. In fact, the UK IHT liability could be as high as 40% on everything you leave to your beneficiaries above £325,000. Helpfully a tax-free £175,000 ‘family home allowance’ generally applies too which could help lessen the impact.

Non-UK domicile (non-doms) and IHT

If you have a domicile outside of the UK, your exposure to UK IHT is limited to your UK assets only. UK assets generally enjoy a tax-free allowance of £325,000 plus a £175,000 ‘family home allowance’. Any assets held outside of the UK won’t face the 40% UK IHT liability which can be hugely advantageous.

However, it’s important to be aware of any taxes due elsewhere. For non-doms moving to the UK, bear in mind that you can become UK domiciled by choice or after you have been UK resident for 15 out of the last 20 years; whichever comes first, so some planning over the long-term will be needed. And if you originally had a UK domicile but have swapped to a domicile of choice outside the UK, bear in mind that you are generally treated as UK domiciled if you are classed as resident in the UK for tax purposes.

The best way to control your exposure to IHT, and that of your heirs, is to create a comprehensive tax-efficient strategy tailored to your specific assets, residency and domicile status. To discuss any aspect of your UK tax planning please contact us.

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