How does inheritance tax work for UK expats?

Alana Graham, Barrister and Head of Private Client at Blackhams Solicitors, explains why an individual’s domicile is of paramount importance when it comes to Inheritance Tax (IHT) and looks at the application of IHT to UK expats.

Can you change your domicile of origin?

It should be stated at the outset that in the UK ‘domicile’ is not the same as ‘residence’. ‘Domicile’ can mean one of three things:

A domicile of origin is obtained from a person’s father. If, however, the person is illegitimate, or his father is dead, he would obtain his mother’s domicile. He will keep this domicile until he chooses another domicile.
A domicile of choice is acquired by showing that a person’s main residence is in a country which is not his domicile of origin and that he has decided that this new country will be his only or main residence.
A domicile of dependence is defined by HMRC as ‘the domicile that the law ascribes to an individual because of that individual’s lack of legal capacity and legal dependence upon another person.’

You can change your domicile of origin by adopting a domicile of choice, however you will need to show that you have settled in the new country and intend to stay there permanently. If you later relinquish your domicile of choice and do not acquire another domicile of choice, then your domicile of origin will apply.

What is the Statutory Residence Test?

The Statutory Residence Test (SRT) first appeared in the Finance Act 2013 in Schedules 45 and 46. It applies from 6 April 2013 to determine whether or not a person is UK resident for Income Tax, CGT and IHT. (It should be noted that Schedule 46 abolished the concept of ordinary residence.)

Schedule 45 section 3 states that an individual (‘P’) is resident for a tax year (‘year X’) if at least one of the Automatic Residence Tests is met for that year or the Sufficient Ties Test is met for that year. If neither of those tests is met for that year, P is not resident in the UK for that year.

Automatic Residence Test

The Automatic Residence Test is met for year X if P meets at least one of the automatic UK tests, and none of the automatic overseas tests. In other words, you need to consider both of these tests in detail.

The Automatic UK tests are found in section 6 onwards. They are as follows:

(i) 1^st test – that P spends at least 183 days in the UK in year X.

(ii) 2^nd test – that P has a home in the UK during all or part of year X; that home is where P spends a sufficient amount of time (at least 30 days) in year X; and that there is at least one period of 91 consecutive days in which the following conditions are met:

the 91-day period occurs while P has that home
at least 30 days in total of that 91-day period falls within year X, and
throughout that 91-day period P has no overseas home or P has one or more overseas homes but each of those homes is a home where P spends no more than a set period of time in year X (i.e. less than 30 days in year X).

(iii) 3^rd test – that P works sufficient hours in the UK as assessed over 365 days and that during that period there are no significant breaks from UK work; that all or part of that period falls within year X; that more than 75% of the total number of days in the 365 day period on which P does more than 3 hours’ work are days on which P does more than 3 hours’ work in the UK; and at least one day which falls in both that period and year X is a day on which P does more than 3 hours’ work in the UK.

(iv) 4^th test - if P dies in year X, for each of the previous tax years P was resident in the UK because he met the automatic residence test. Even if P were not resident in the UK for year X, the tax year preceding year X would not be a split year (i.e. if the individual is resident in the UK for that year, and the circumstances of the case fall within either cases involving actual or deemed departure from the UK, or cases involving actual or deemed arrival in the UK). When P died either his home was in the UK or if he had more than one home at least one home was in the UK and if he had a home overseas during all or part of year X P did not spend a sufficient amount of time there in year X (i.e. at least 30 days in year X or P was there for at least some time on each day of year X up to and including the day he died).

Automatic Overseas Tests

The Automatic Overseas Tests are found in section 11 onwards. They are as follows:

(i) 1^st test: that P was resident in the UK for one or more of the 3 tax years preceding year X; that the number of days in year X that P spends in the UK is less than 16 and P does not die in year X.

(ii) 2^nd test: that P was resident in the UK for none of the 3 tax years preceding year X and the number of days that P spends in the UK is less than 46.

(iii) 3^rd test: that P works sufficient hours overseas as assessed over year X; that during year X there are no significant breaks from overseas work; that the number of days in year X on which P does more than 3 hours’ work in the UK is less than 31 and the number of days in year X is less than 91.

(iv) 4^th test: that if P dies in year X, P was resident in the UK for neither of the 2 tax years preceding year X or, P was not resident in the UK for the tax year preceding year X and the tax year before that was a split year.

(v) 5^th test: that if P dies in year X, P was resident in the UK for neither of the 2 tax years preceding year X because P met the third automatic overseas test for each of those years or, the tax year before that was a split year.

Sufficient Ties test

Section 17 (below) says that the Sufficient Ties Test will be met for Year X if P meets none of the Automatic UK tests and none of the Automatic Overseas Tests but has sufficient UK ties for that year.

What counts as a “UK tie” depends on whether P was resident in the UK for one or more of the 3 tax years preceding year X. If P was resident in the UK for one or more of those 3 tax years, each of the following types of tie counts as a UK tie:

a family tie – i.e. in year X, a relevant relationship exists at any time between P and another person, and, that other person is someone who is resident in the UK for year X
an accommodation tie (i.e. P has a place to live in the UK, that place is available to P during year X for a continuous period of at least 91 days, and P spends at least one night at that place in that year)
a work tie (i.e. if P works in the UK for at least 40 days (whether continuously or intermittently) in year X. at more than 3 hours' work in the UK on that day)
a 90-day tie,(i.e. if P has spent more than 90 days in the UK in— the tax year preceding year X, the tax year preceding that tax year, or each of those tax years separately)
a country tie (i.e. if the country in which P meets the midnight test for the greatest number of days in year X is the UK).

If P was a resident in the UK for none of those 3 tax years, each of the following types of tie counts as a UK tie:

a family tie
an accommodation tie
a work tie
a 90-day tie

In order to have the requisite number of UK ties for year X, each tie of P's must be of a different type.

The table below shows how many UK ties are sufficient in a case where P was resident in the UK for one or more of the 3 tax years preceding year X:

Days spent by P in the UK in year X	Number of ties that are sufficient
More than 15 but not more than 45	At least 4
More than 45 but not more than 90	At least 3
More than 90 but not more than 120	At least 2
More than 120	At least 1

The table below shows how many UK ties are sufficient in a case where P was resident in the UK for none of the 3 tax years preceding year X:

Days spent by P in the UK in year X	Number of ties that are sufficient
More than 45 but not more than 90	At least 4
More than 90 but not more than 120	At least 3
More than 120	At least 2

What is double taxation relief for IHT purposes?

Depending on specific requirements being met, double taxation treaties provide a relief which may ease the situation and allow you to avoid or reclaim certain taxes, including IHT.

Double taxation conventions allow the country where the deceased was domiciled to tax all the deceased’s property no matter where in the world it is situated. The country where the property is physically situated is only allowed to tax specific types of property, for example, immovable property.

Double Taxation Relief is listed in the appropriate treaty of each country. For example, the treaty for the USA states that: property of a person domiciled in the UK which becomes comprised in a settlement, shall be exempt from tax in the UK to the extent of 50% of the value transferred. (Please note there are other requirements that must be met before this can apply.)

It should be noted that the treaties (i.e. the relief obtained under them) will not apply if the relevant country has no tax which is equivalent to IHT or, if there is a tax similar to IHT it is charged at 0%.

Do British expats and non-residents have to pay IHT in the UK?

As will be seen the above, the tests are fact specific, and each case turns on its own facts. Hence it is extremely difficult to just answer the above question with a ‘yes’ or ‘no.’

It is therefore crucial that anyone seeking advice in this area obtains competent legal assistance.

About the author

Alana Graham is a Barrister and Head of Private Client at Blackhams Solicitors.

Find out more

Finance Act 2013 (Legislation)

Inheritance Tax: Double Taxation Relief (GOV.UK)

Images

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Publication date

18 September 2024

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.