UK Inheritance Tax Planning

A mixed domicile couple is very simple. It is a couple that has 2 different domiciles of origin. (i.e. a husband who was born in the U.K. and a wife born in the U.S). If a mixed domicile couple is planning to return to the U.K. the couple can shelter non-U.K. assets in trust and may still benefit from these assets within their lifetimes free from the U.K. IHT regime.

The U.K. has a rather antiquated process when it comes to legal definitions. Although you may elect a domicile of choice, you may never shred your connection to the U.K. if you were born in the U.K. as you have a Domicile of Origin. Even if you were only in the U.K. whilst you were a baby you may never erase this fact. If an individual has a Domicile of Origin and leaves the U.K. under U.K. law they are considered to be formerly domiciled in the U.K. this status is known as a “Formerly Domiciled Resident” or FDR. The issue of this, is if a FDR were ever to repatriate back to the U.K., the U.K. would typically want to assume the taxing rights (domicile) at death regardless of where they lived throughout their lives. This is why it is imperative that planning for your return to the U.K. should be made when you are not domiciled.

Planning for the U.K. IHT regime must continue for the first four years of residence in the U.S. as under the treaty and under the 17/20 rule you would be considered a U.K. domicile at death and liable to U.K. IHT. It is important to revisit your situation if in any of the subsequent years you are deemed a tax resident of the U.K. as per the statutory residence test and then reassume your domicile of choice in the U.S. Short term protection products may be suitable for you if your estate is in excess of the nil rate band (£325k or £650K for married couples). Bespoke arrangements can be considered for mixed/non-domiciled clientele. Retaining your primary residence in the U.K. may be suitable in certain circumstances to take advantage of the Residential Nil Rate Band (RNRB) which uplifts the Nil Rate Band (NRB). The consensus is that RNRB is eligible in respect of property previously owned and lived in, even if that property that is currently rented out to generate income. After this four year period, most individuals will fall under the U.S. estate tax regime which has much higher thresholds before being subjected to IHT.

In 1978 the U.K. & U.S. signed an agreement which was ratified in 1980 in a convention between each respective governments on Estate & Gift Tax. The convention dictates in which scenario an individual is domiciled in each respective country under certain parameters. The agreement has a general principal where if an individual is deemed to be domiciled at death in one state but also has a connection to the other state a ruling as per the treaty is necessary. There are instances where either taxing states will assume domicile over the other so it is important to understand and consider professional advice to ensure that you are planning your estate planning needs in consideration of the IGA. Where you are a dual citizen of the U.S. & U.K. this brings into additional complexities that require legal advice.

A domicile in simple terms is the specific country that is considered to be that individual’s home. This affects your estate planning especially if you establish a domicile of choice. A domicile of choice is much like it sounds, although you have a home you may elect out of your own free will to live in another country. When you do this you assume a domicile of choice in that country. A domicile affects your estate planning because it is your domicile that determines in which jurisdictions you are subject to estate/inheritance tax.