Domicile Status: Why it is important and how it effects Inheritance Tax

Domicile status plays a crucial role in determining an individual’s liability for inheritance tax (IHT). Inheritance tax is a tax imposed on the estate of a deceased person, and it varies depending on the domicile status of the deceased individual. Domicile refers to the country that a person treats as their permanent home or intends to return to, even if they are living in another country.

First lets look at why your domicile status is so important:

Domicile status holds significant importance in the United Kingdom (UK) for various legal and financial matters. In the UK, domicile is a key factor that influences taxation, inheritance, and legal rights. Here are a few reasons why domicile status is important in the UK:

1. Taxation: Domicile status plays a crucial role in determining an individual’s tax obligations.  Those who are UK resident with a UK domicile are subject to tax on their worldwide income and gains on an arising basis.  However, those that are UK resident but non-domiciled (non-doms) may claim to be taxed on the remittance basis, whereby they do not have to pay UK tax on foreign income and gains on the condition that the income is not remitted to the UK. Understanding and establishing your domicile status correctly can help optimise your tax planning and ensure compliance with UK tax laws.
2. Inheritance and succession: Domicile status affects the laws governing inheritance and succession in the UK. The concept of “domicile” is used to determine which jurisdiction’s laws apply to an individual’s estate upon their death. It determines the rules regarding the distribution of assets, the taxation of the estate, and the validity and execution of wills. Properly establishing your domicile status is crucial for effective estate planning and ensuring that your assets are distributed according to your wishes.
   
3. Legal capacity and jurisdiction: Domicile status also determines an individual’s legal capacity and the jurisdiction where legal disputes are resolved in the UK. For example, divorce proceedings and property disputes are often handled in the courts of the country where the individual is domiciled. Understanding your domicile status is important for determining the applicable legal system and ensuring that your legal rights are protected.
   
4. Establishing Intent: Domicile status helps demonstrate an individual’s intent to permanently reside in a particular jurisdiction. It involves considering factors such as physical presence, the duration of stay, connections to the community, property ownership, and business interests. Proving a change in domicile can be essential in cases where individuals wish to establish a new permanent residence for legal, tax, or personal reasons.

For inheritance tax purposes, there are three types of domicile status: domicile of origin, domicile of choice, and deemed domicile.

Domicile of Origin:

An individual acquires a domicile of origin at birth, which is typically the domicile of their father, unless their parents were unmarried or the mother has legal custody. Domicile of origin is challenging to change as it requires evidence of a permanent and deliberate intention to abandon the previous domicile and acquire a new one.

Domicile of Choice:

A domicile of choice can be acquired by demonstrating a clear intention to establish a new permanent home in another country. This intention must be accompanied by actual physical presence and residence in that country. Factors considered include the length and nature of the residence, business and personal connections, and ties to the new country.

Deemed Domicile:

The concept of deemed domicile was introduced to prevent individuals from avoiding inheritance tax by leaving the country permanently but retaining significant ties. Under UK tax law, an individual is deemed domiciled if they have been resident in the UK for at least 15 of the previous 20 tax years. Once deemed domiciled, an individual is subject to inheritance tax on their worldwide assets.

The domicile status of an individual has significant implications for inheritance tax liability. UK-domiciled individuals are subject to inheritance tax on their worldwide assets, regardless of where they are located. Non-domiciled individuals, on the other hand, are liable for inheritance tax only on their assets situated in the UK.

Non-domiciled individuals have the option to claim the remittance basis of taxation, whereby they are only taxed on their foreign income and gains if they are remitted, or brought, into the UK. This provides an advantage to non-domiciled individuals as they can potentially avoid inheritance tax on their non-UK assets if they do not bring them into the country.

Establishing and maintaining the correct domicile status is crucial for individuals residing in the UK. It affects tax liabilities, inheritance planning, legal rights, and access to specific tax advantages. Consulting with legal and tax professionals who are well-versed in UK domicile laws is essential to ensure compliance and make informed decisions based on your unique circumstances

Our team at Edge Tax can review your domicile position to ascertain your status for IHT whilst helping you mitigate as much of your tax bill as possible, please contact us here

For more IHT tips keep an eye on our social pages Facebook Instagram and LinkedIn