Domicile is a general legal concept which in basic terms is taken to mean the country where you permanently belong. But actually, determining domicile status can be complex. HMRC guidance states that domicile cannot be defined precisely, but the concept rests on various basic principles.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, lots of factors are considered for example, the location family, property and business interests.

There is also a further UK concept of deemed domicile, whereby under rules introduced from April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years are deemed to be domiciled in the UK for tax purposes. This makes them liable to Inheritance Tax (IHT) on their worldwide assets.

IHT is generally chargeable to people domiciled (or deemed domiciled) in the UK or with assets sited in the UK. For example, HMRC’s manuals states that if someone creates a settlement with assets outside the UK, when they are not domiciled in the UK, the settlement could be excluded from the charge to IHT. There are also double tax agreements that can, depending on the circumstances, change a person’s liability to IHT.

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who had died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  – shares controlling more than 50% of the voting rights in a listed company
  – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

We wanted to remind our readers of the Inheritance Tax (IHT) implications of making cash gifts during the current 2021-22 tax year that will end on 5 April 2022.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn’t make any cash gifts in 2020-21, you could gift up to £6,000 before the end of this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you haven’t used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

A trust is an obligation that binds a trustee, an individual or a company to deal with the assets such as land, money and shares which form part of the trust. The person who puts assets into a trust is known as a settlor and the trust is for the benefit of one or more ‘beneficiaries’. The trustees make decisions regarding how the assets in a trust are to be managed, transferred or held back for the future use of the beneficiaries.

IHT planning can involve the careful use of trusts. There are a number of trusts which are subject to different tax rules. The main types are bare trusts, discretionary trusts, interest in possession trusts and mixed trusts.

One of the most widely used, and as the name suggests, most basic kind of trust is a bare trust. These trusts are also known as simple trusts or naked trusts. Under a bare trust, each beneficiary has an immediate and absolute title to both capital and income. The beneficiary of a bare trust is taxable on the trust income and gains.

HMRC’s guidance states that beneficiaries must include trust income and gains in any tax return they are required to complete or in any forms R40. The trustees of a bare trust may pay the tax due to HMRC on behalf of a beneficiary, but it is the beneficiary who is strictly chargeable to tax.

There are key differences between a bare trust and other types of trusts that are beyond the scope of this article.

Inheritance Tax (IHT) is a tax that is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.  There is a nil-rate band, currently £325,000 below which no IHT is payable.

Transfers between married couples and civil partners are not usually subject to IHT, meaning that when the first partner of a couple dies leaving their estate to the other no IHT will be payable. The surviving partner also receives any unused nil-rate band allowance of the deceased.

The main limitations on spouse or civil partner exemption are that it does not apply to

• postponed gifts – under certain circumstances, a transfer to a spouse or civil partner is not exempt if it ‘takes effect on the termination after the transfer of value of any interest or period’.
• conditional gifts – a gift to a spouse or civil partner is not exempt if it depends on a condition which is not satisfied within twelve months after the transfer.

In addition, the spouse or civil partner exemption does not apply to certain dealings with settled property, including reversionary interests.