The Effect on Estate Planning with Non-UK Domiciled clients

Broadly speaking, domicile is a legal term referring to the country that a person treats as their permanent home or a country they have the closest ties to. It’s used when someone has connections to multiple countries.

This article is not designed to provide specific advice on what domicile clients might have, as it is a very complex area! However, it is essential to understand how a client’s domicile can affect their estate planning options.

What is ‘domicile’ and how does it apply to estate planning?

When an individual has links with more than one country, domicile is a concept used by the courts to determine which system of personal law applies to them. For example, these laws could be in relation to marriage, wills and succession.

Domicile is also part of UK tax legislation. It establishes an individual’s exposure to tax, including inheritance tax (IHT) – our focus for estate planning purposes.

UK domiciles will generally be taxed on worldwide assets for IHT.

Some countries have an agreement that if there is IHT due locally, the tax is credited so that it is not paid twice.

It is extremely difficult to lose one’s UK domicile. Any slight links retained here could be argued as being confirmation of a retained UK domicile status for IHT by HMRC. So, merely no longer living in the UK does not necessarily mean the loss of one’s UK domicile for IHT.

As a client’s domicile drives IHT, this could affect the planning for married couples or civil partners. (As an unmarried client’s domicile will not impact IHT, there is no difference in the estate planning process.)

How domicile affects estate planning for couples

There is a critical circumstance when domicile will impact clients: when one spouse is UK domiciled, the other spouse is not, and the UK domiciled spouse dies first.

Usually, when both spouses are UK domiciled, inheritance from one to another is fully exempt from IHT as a gift between spouses. However, when the inheriting spouse is not UK domiciled, the exemption for IHT is limited.

The UK domiciled spouse has their usual tax-free amount of the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) (if it applies), then the spouse exempt amount, which is equal to the prevailing NRB. Currently, that means an additional £325k. Any excess over that amount would be taxable to 40% IHT on the first death.

This means that the structure of the will and recommended trusts need to be carefully considered. You will need to alter the usual will-to-trust clauses to accommodate the different IHT position, reflecting the reduced spousal exemption.

UK Domicile Positions

The following UK domicile positions could have an effect on the estate planning structure for married or civil partnered couples where one spouse is a UK domicile and the other is a non-UK domicile, depending on estate value:

• Domicile of origin. Your country of birth and/or your parents’ domicile (normally the father’s). This will generally determine where you are taxed for IHT and will apply to most clients.

• Deemed domicile. A non-UK domiciled individual who has lived for 15 out of 20 tax years in the UK is deemed domiciled for UK IHT.

• Domicile of choice. A non-UK domiciled spouse can make an election with HMRC to become UK domiciled for IHT purposes. The effect of this election is that transfers from their UK domiciled spouse will then be fully exempt, so their estate planning would be as normal; however, they will also suffer IHT on their worldwide assets if they have any, so this also needs to be considered.

Key Points in Summary:

• If both clients are non-UK domiciles, the death planning is the same as if they were both UK domiciles.

• A non-UK domicile spouse’s UK estate is fully exempt from IHT when left to the UK spouse.

• If the UK domicile spouse has a larger estate, this could affect the drafting of the will, as the tax-free spousal exemption for IHT allowance is limited.

• A non-UK domicile spouse can elect to become a UK domicile for IHT, and then the spousal exemption is unlimited, but their worldwide assets are taxable to UK IHT.

If you’re a CTT member and need help finding solutions for clients regarding estate planning and domicile, please get in touch.

Or, if you’re interested in gaining more technical assistance with your estate planning, sign up for CTT membership.