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 concept in the UK of deemed domicile, whereby under rules introduced from 6 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 many double tax agreements that can, depending on the circumstances, change a person’s liability to IHT.

It is possible in certain circumstances for an individual to have two domiciles although this is unusual. There is a concept in the UK of deemed domicile, whereby any person who has been resident in the UK for more than 15 of the previous 20 years will be deemed to be domiciled in the UK for tax purposes.

Before 6 April 2017, a person was treated as UK domiciled if they were resident in the UK for 17 of the 20 years of assessment ending with the year in which the relevant time fell. These rules are intended to prevent those with the most significant links to the UK from claiming non-dom status.

There is also a three-year rule that applies to a taxpayer who was domiciled in the UK on or after 10 December 1974 and at any time within the three calendar years before the relevant event (the death or gift). If either rule applies then, in most cases, HMRC will treat the person as domiciled (deemed domicile) within the UK for Inheritance Tax purposes.

The deemed domicile rules, or an election to be treated as domiciled in the UK, do not apply under certain limited circumstances. This includes double tax treaties and means that individuals from France, Italy, India or Pakistan cannot usually become deemed domiciles.

Inheritance Tax (IHT) is commonly collected on a person’s estate when they die but can also be payable during a person’s lifetime on certain trusts and gifts. The rate of IHT currently payable is 40% on death and 20% on lifetime gifts.  IHT is payable at a reduced rate on some assets if 10% or more of the 'net value' of their estate is left to charities.

Funds from the estate of the deceased are usually applied to pay IHT. If there is a will, it is usually the executor who deals with paying any IHT due to HMRC. IHT can be paid from funds within the estate, or from money raised from the sale of the assets. The deceased may also have used a life insurance policy to fund the payment of some / all the IHT due.

There is a nil-rate band, currently £325,000 below which no IHT is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is on top of the £325,000 IHT nil-rate band.

The recipient of gifts from the deceased may be personally liable to IHT if the deceased gave away more than £325,000 in the 7 years before their death. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. The rate of IHT gradually reduces over the 7-year period becoming exempt from IHT after 7 years have passed.

Some gifts will typically be tax-free from the time they are made such as regular gifts made from excess income, the first £3,000 worth of gifts each tax year and gifts between spouses and civil partners.

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who has 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.

Claiming the relief can be a complicated process. We can of course help review the facts and advise.

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 places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

Some assets are classed as ‘excluded property’ and IHT is not due. However, the value of the assets may be included when calculating the rate of tax on certain exit charges and 10-year anniversary charges.

Types of excluded property can include:

• property situated outside the UK – that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
• government securities – known as FOTRA (free of tax to residents abroad)

This can be a complex area and specialist advice is usually required to ensure that a trust operates as effectively as intended.