UK Inheritance Tax – It often affects people living in Australia too

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UK Inheritance Tax (IHT) doesn’t go away if you move to Australia or become an expat – at least it doesn’t immediately.

This is because the liability of a deceased person’s estate to UK IHT is a function of the individual’s domicile status in the UK, rather than residency.

Note: Inheritance Tax is a tax which usually affects the estate of someone who has died.

Anyone who is domiciled in the UK is liable to IHT on their worldwide assets.

Those who are not domiciled in the UK are only subject to UK IHT on estate that is located in the UK, such as real estate in the UK, or bank accounts maintained in the UK.

There are 3 types of domicile under UK tax law for adults:

  • A domicile of origin. When a person is born, s/he acquires the domicile which his/her father considered to be his real or permanent home at the date of your birth. If the individual’s parents were not married when s/he was born, the domicile of origin is usually the same as the mother’s.
  • A domicile of choice. To acquire a domicile of choice:
    • The person must show that s/he has settled permanently in the jurisdiction in which s/he now considers him/her self domiciled.
    • The person must intend to stay there for the rest of his/her life.
  • A deemed domicile. You are treated as being domiciled in the UK if you:
    • Were resident in the UK for 17 of the last 20 UK tax years, or
    • Had your permanent home in the UK at any time in the last 3 years of your life

Importantly, changes – the UK Government terms these as “reforms” – are on the way in respect of domicile.

These changes are discussed here.

Under these changes – which became law from the 6th of April, 2017 – a deemed domicile in the UK will arise when an individual has been a resident of the UK for 15 out of the last 20 UK tax years, rather than the 17 out of 20 years that applied previously.

Consideration is often also required of tax residency in the UK.

Since the 6th of April, 2013 the UK has had a Statutory Residency Test (SRT) in place, which provides a measure of certainty over a taxpayer’s residency status in the UK, particularly when departing the UK to live and/or work overseas, or arriving in the UK to live and/or work.

While providing certainty, the SRT is complex, and for those seeking clarity on their domicile status when departing the UK the exercise is also likely to require a consideration of UK residency status.

While few of us like contemplating our own mortality, those who are living in Australia with estate valued at more than the IHT nil rate band should consider taking professional advice if there is a wish to ensure that as much of the estate as possible is passed onto our loved ones.

This should include a consideration of taxes arising on death in Australia: while Australia does not have an equivalent to Inheritance Tax, an estate can find itself subject to capital gains tax in Australia when investment assets of the estate are bequeathed to a person who is not a tax resident of Australia.

This can be overcome – often through the use of what is called a testamentary trust – but again, professional guidance will be desirable when drafting a Will, most probably in Australia and the UK.