12 March 2014

Reminder of common nasty traps on UK domicile

Dora Clarke
Partner | UK

1. The concept of domicile in the UK is slightly different from the US concept.

2. A UK domicile of origin has tenacity and is the most difficult to abandon.

  • For example, assume Mary (who grew up in the UK to British parents) moved to California and acquired a domicile of choice there. If she later relocated to a different state, eg New York, with no clear intention of staying there, but having made the decision to leave California, she will have given up her domicile of choice in California without acquiring a new domicile of choice and her UK domicile of origin will be resurrected automatically and she will be domiciled in the UK for worldwide inheritance tax purposes.

3. Remember, a “deemed” domicile in the UK for inheritance tax purposes is acquired automatically by living in the UK in 17 out of 20 UK income tax years; this can therefore be as little as 15 calendar years plus a few extra days. It is always important to do the maths and those who first moved to the UK between 6 April 1998 and 5 April 1999 are likely to find themselves deemed domiciled in the UK with effect from 6 April 2014.

4. A person who is domiciled or deemed domiciled in the UK will incur an immediate inheritance tax charge of 20% if they put assets in trust (wherever those assets are situated). This is particularly important to remember in the context of estate planning after a move from the UK. Placing everything in trust as part of an estate planning exercise e.g. to avoid the probate process on death (as is often the way in California) can trigger an up front and unexpected charge.

5. Even if not domiciled, or deemed domiciled in the UK if any assets situated in the UK are placed in trust unless the value does not exceed £325,000 (or other reliefs are available) then again there will be an instant 20% inheritance tax charge.

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