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The Impact of Death and Domicile on IHT
Establishing the domicile of an individual on death is fundamental to determining the exposure and, therefore, liability to inheritance tax (IHT). Often this area is misunderstood and can lead to complexities during the estate administration. In this article, we discuss the various categories of domicile with a particular focus on the statutory notion of deemed domicile.
What Is Domicile?
Domicile is a common law concept that is broadly summarised as an individual’s ‘permanent residence’. Under English law there are three key categories of domicile:
Domicile Of Origin
This is acquired at birth by reference to the parent’s domicile. Typically, an individual takes their father’s domicile status. This status can be displaced by either of the following two categories.
Domicile Of Dependency
A dependent individual acquires the same domicile of the person on whom they are dependent. For example, if a parent acquires a domicile of choice in a different jurisdiction, then the dependent would also acquire the same domicile. Dependent individuals include unmarried children under the age of 16 and mentally disordered individuals.
Domicile Of Choice
To establish a domicile of choice, the following two elements must be evident:
- physical presence in the territory concerned; and
- an intention to reside permanently and/or indefinitely in the territory.
The extent to which an individual is exposed to IHT depends on their domicile status and broadly the outcome is as follows:-
- Individuals who are UK domiciled are subject to IHT on their worldwide estate.
- Individuals who non-UK domiciled are only subject to IHT on their UK estate (ie assets that are considered UK situated for IHT purposes).
Statutory Provisions For UK Deemed Domicile In IHT
There are two key statutory provisions to treat otherwise non-UK domiciled individuals as UK deemed domiciled for IHT purposes:-
- Formerly Domiciled Residents – Applied to individuals who were born in the UK with a UK domicile of origin. These individuals will acquire a deemed domicile status for IHT purposes if they were both a UK resident for the tax year in which the relevant event occurs and they were a UK resident for at least one of the two tax years immediately before this event.
- 15 out of 20 Year Rule – Non-domiciled individuals are treated as UK domiciled for IHT when they have been a UK resident for 15 out of the last 20 years.
The implication of deemed domicile is an important consideration for spouses and civil partners as it can significantly impact the spousal exemption for IHT that is available to them. Transfers from UK domiciled spouses and civil partners to non-UK domiciled spouses and civil partners are not entirely exempt from IHT in the usual way. Instead there is a limited spouse exemption.
Election To Be Treated As UK Domiciled
An option available to non-UK domiciled individuals is, however, to elect to be treated as domiciled in the UK for IHT purposes only. There are three main circumstances when an election can be made:-
Lifetime Election
This can be made where the couple are both alive if the couples are married or in a civil partnership and if at any time on or after 6 April 2012 and at any time during the period of 7 years ending with the date on which the election is the made, the electing spouse or civil partner had a spouse who was domiciled in the UK.
Death Election
This can be made within 2 years of the death of the deceased and if at any time on or after 6 April 2013 and within 7 years ending with the date of death, the deceased was domiciled in the UK and the spouse would by virtue of the election be treated as domiciled in the UK.
Election By Personal Representatives
This can be made by the PRs if both spouses have passed away and if during the 7 years ending with the date of death the deceased individual’s spouse or civil partner, that spouse/civil partner was UK domiciled.
How Can Quastels Help?
We at Quastels have extensive experience in dealing with questions relating to domicile. This includes advising non-UK domiciled clients currently living in the UK, clients who are planning on leaving the UK and clients who are planning to move to the UK.
It is important that a domicile review is undertaken every few years to accurately record an individual’s circumstances and account for any changes that may potentially impact the domicile of an individual.
We often see that clients rely heavily on the Statutory Residency Test and the statutory requirements for deemed domicile and ignore the fact that they could have acquired a domicile of choice before the 15 year rule has applied. We advise that alongside a domicile review, a statement of domicile is prepared and regularly reviewed where there is any potential question of domicile.
For Private Wealth & Tax advice and services, please contact Eleanor Catling via our contact form below.
Why Does my BRP Expire on 31 December 2024?
Individuals who have been granted Limited Leave to Remain or Indefinite Leave to Remain may notice their Biometric Residence Permits (BRPs) have an expiry date of 31 December 2024, even if their permission period is longer or indefinite.
If your BRP card is due to expire on 31 December 2024 and you were granted leave beyond this date, there is no need to be concerned. For precise information concerning your immigration permission dates, applicants should review their decision letter when they were granted their visa status in the UK.
The Home Office has stated that as of January 1, 2025, individuals will not require a BRP to prove their status. Instead, they will be able to validate their immigration status through the view and confirm your immigration status service online. The Home Office plans to facilitate online proof of status, with details on the process expected in early 2024. The expiration date on the BRP does not necessarily affect one’s immigration status.
Existing BRP holders can utilise online verification services to validate their right to work and right to rent in the UK, ensuring accurate information regarding their right to remain.
The Home Office is expected to provide further clarification in early 2024 on how individuals can prove their status.
Should you have an immigration enquiry, please reach out to the Immigration Department at Quastels by using the enquiry form below.
A Global Standard for Incapacity: STEP’s GRP Proposal and Its Implications
Introduction
Planning for loss of capacity can be challenging at the best of times. Lasting Powers of Attorney (LPAs), or their international equivalents, enable an individual (technically, a donor in the case of LPAs) to appoint representatives (or attorneys) to carry out their wishes should they become incapacitated or unable to make decisions to protect their own interests.
Each jurisdiction has its own regulations and formalities in relation to questions of incapacity and some jurisdictions have no framework in place at all. Even where there is a framework, as with the UK’s system, representatives (or attorneys) often encounter difficulties in obtaining recognition of their LPAs for use abroad, as this article will explore.
An Illustration
Let us consider a donor who works in the UK, as this is where his business is headquartered. The UK is not his country of origin, and nor is it the jurisdiction where his family and most of his assets is situated. His business has offices worldwide and he personally has multiple bank accounts and properties in those jurisdictions too.
This individual has registered both types of LPA (i. Property & Financial Affairs and ii. Health & Welfare), but when he sadly develops an illness which inhibits his decision-making powers, the attorneys discover that the LPAs are not recognised in the other jurisdictions where he operates his business interests and owns assets.
STEP’S Global Representative Power
In an attempt to address this issue, we illustrate above, the Society of Trust and Estate Practitioners’ (STEP) has proposed a model for an internationally recognised power of attorney, with the intention that it may be accepted worldwide.
In August 2023, STEP’s expert members set out their proposal for a so-called ‘Global Representative power’ (GRP). STEP hopes that the GRP will serve as a global benchmark when reviewing or implementing new legislation, particularly in jurisdictions where the laws surrounding cross-border incapacity fail to exist or are not as robust as can be. In effect, this is an effort at achieving harmonisation on questions of incapacity in a manner which reflects and accommodates our globalised world.
The proposed GRP is not intended to replace any existing framework (at least for now), but instead it seeks to offer additional security by capturing the strengths and characteristics of LPAs in a single ‘catch-all’ guide, which if adopted accurately, will enable donors and their representatives, the ease of managing their affairs in a harmonised global manner and without jurisdictional issues.
The GRP is still a template at present, which is likely to be subject to change. The model application forms can be viewed as part of the GRP toolkit published by STEP which includes guidance, considerations, and final certificate templates.
What Does STEP Aim To Achieve With Its Proposed GRP?
STEP conducted a survey in partnership with Alzheimer’s Society last year, which received responses from 756 members in 44 countries. Responses showed an overwhelming demand for further information and international discussion on how practitioners should offer advice to clients seeking to protect their assets, and for greater recognition and portability of LPAs across borders.
The key objective behind STEP’s proposal is to raise general awareness of the considerations behind incapacity and to encourage policy makers to:
- Ensure global legislation is robust and consistent;
- Safeguard against abuse; and
- Educate about capacity and associated planning.
Ultimately, STEP hopes to set a ‘gold standard’ which will be consistent in each jurisdiction. If successful, there is potential that the GRP will set the standard in minimising the time and cost constraints of registering multiple LPAs and appointing different attorneys in different jurisdictions.
Having a harmonious approach to incapacity globally should prevent donors from being left without attorneys in a jurisdiction where LPAs have no effect. In the UK, the absence of an LPA or some global equivalent with effect in the UK, would result in family members having apply, at some cost, to the Court of Protection.
Limitations Of The GRP
The GRP is limited to decision-making relating to property and financial affairs, whereas LPAs can also be used for matters relating to health and welfare. As such, even if the GRP is implemented, clients ought to consider their health and welfare needs in each jurisdiction where they spend any considerable time.
As always, donors should consider their chosen representatives in great detail. An attorney might be competent to manage the affairs in one jurisdiction but may be challenged with obstacles such as language barriers in another. An attorney who is fit to manage personal finances may not be equipped to manage the donor’s businesses. In these situations, it may be more practical to appoint different attorneys in different jurisdictions.
Whilst the GRP may be adopted worldwide, it is currently nothing more than a proposal and has no legally binding effect as things stand. STEP will urge jurisdictions worldwide to consider the GRP as far as possible, but it is down to the jurisdiction interpreting the GRP to ensure that standards are upheld, and suitable legislation is introduced to achieve the GRP’s core objectives.
For these reasons, and until the principles held within the GRP become wholly enforceable, it is still recommended that donors should seek advice on the requirements pertaining to the laws of incapacity, as they currently stand (both relating to property and financial affairs and health and welfare) in each jurisdiction of interest.
Conclusion
There is a long way to go despite STEP’s efforts to address a grey area that is cross-border incapacity, and the uncertainties that currently stand in the way of ensuring donors and their representatives have a thorough and effective process of managing their assets overseas.
Acceptance or even mere discussion of the GRP can be regarded as a step in the right direction. However, guidance may not be enough, and some degree of harmonisation brought about by legal measures is more likely to deliver on these stated objectives.
As matters stand, we continue to advise and recommend clients that the appropriate LPAs are registered, both in terms of assets and health. Further guidance can be found in the following briefing note on LPAs.
For tax and private client advice and services, please contact Ben Rosen via our contact form below.