Obtaining UK Non-Domicile Status

The Situation
An elderly UK national, Mr Q, has been living in Australia for 20 years and has a worldwide estate (mostly sited in Australia) valued at £1 million.

The Problem
Many UK nationals live under the misapprehension that because they live outside the UK they are no longer subject to UK Inheritance Tax (IHT). Wrong! Any UK domiciled individual, generally someone born in the UK, will retain their UK domicile – known as domicile of origin – irrespective of their residence, until death or until the UK Revenue agrees otherwise. The rate of IHT is 40% of the amount by which the total value of their worldwide estate exceeds the nil rate band (2013 – £325,000).

The Solution
Mr Q considers himself to be Australian but he has retained his UK nationality and passport for sentimental reasons. Certainly he is tax resident in Australia, and neither resident, nor ordinarily tax resident, in the UK. But Mr Q may well still be subject to 40% UK IHT. At the current valuation of £1 million, and after subtracting the first £325,000 (which would be exempt from UK IHT), Mr Q’s estate would be subject to a £240,000 tax demand.

To avoid this possibility, Mr Q should take steps to convince the UK Revenue that he is not domiciled in the UK. Legally, Mr Q must satisfy the UK Revenue that he has left the UK, has no intention of returning to the UK to live (temporary visits are not a problem) and has established a permanent home abroad. The UK Revenue will want to see evidence, which should include:

  • purchase of a house in the new country;
  • taking steps to become a national and/or permanent resident of the new country;
  • a long period (seven to ten years) of residency abroad;
  • establishment of a business and other financial ties with the new country;
  • severance of business ties with the UK.

This is not an exhaustive list and other indicators would assist.

The UK HMRC will not give advance rulings. It used to be possible to test a UK domicile by filing a relevant return in the UK. For persons resident outside the UK, this was achieved by making a “chargeable transfer”. This was most easily done by setting up a discretionary trust and transferring into it an amount in excess of the lifetime and annual exemptions. HMRC will no longer rule on such transfers unless “substantial amounts of tax” are at stake so now the standard procedure is to obtain a QC’s opinion.

People who have lived abroad for many years often decide not to make an application, either because they believe themselves to be safe from tax or because they believe that the UK Revenue will not trouble their heirs or their estate upon their death on the grounds that they will not be aware that they have died. This is not prudent. In these days of increasing exchange of information, it is unlikely that anybody of substantial wealth can pass away abroad without his or her home country or country of origin getting to hear about it. Failure to take steps to mitigate UK IHT will greatly impact on the value left to the heirs.

Even if the deceased is subject to IHT in his new country of residence, without appropriate planning he may also pay IHT on the same assets back in the UK. A double charge to IHT could wipe out the entire estate.

Getting an opinion on domicile is an insurance policy. You may think you are not UK domiciled but if the UK tax authority disagrees, you will not be around to argue the point, and your estate and heirs may lose out. The procedure is relatively straightforward and, even if the Counsel decides that you are still UK domiciled, it will be helpful in deciding what to do next. Planning without certainty on the domicile issue can be a disaster.