HOME FIXTURES: DOMICILE, RESIDENCE, IHT AND TAX

It has long been said that “home is where the heart is”.

That simple, somewhat romantic phrase summarises how familiar territory exerts a constant pull no matter where we may find ourselves.

However, glancing through the UK tax code – which, at more than 17,000 pages is reportedly longer than any other in the world (https://www.adamsmith.org/blog/tax-spending/what-we-need-to-do-is-obvious) – in the hope of finding any mention of the word ‘romance’ and you’ll be wasting your time.

Now, I don’t just want to trot out an age-old stereotype of a flinty-faced taxman in a bowler hat.

Yet it is a fact that HMRC is more concerned with applying rules and filling Treasury coffers than tugging heartstrings.

To the Revenue, ‘home’ is a concept which has shifted over the years and, in fact, in recent months.

That is due to changes ushered in as a result of Rachel Reeves’ first Budget as Chancellor of the Exchequer last October (https://www.gov.uk/government/speeches/autumn-budget-2024-speech).

In her speech to the House of Commons, she pledged to “remove the outdated concept of domicile from the tax system”, replacing it with “a new, residence based scheme”.

It was a controversial promise and one which changed a fundamental point in tax law that for many years had shaped how people had managed their assets from the point of view of Inheritance Tax (IHT).

Previously, there was a clear distinction between ‘residence’ and ‘domicile’ for tax purposes.

Residence was, in layman’s terms, where you live, whereas ‘domicile’ had been regarded as someone’s permanent home.

It was either assigned at birth (domicile of origin) or moving permanently to another country (domicile of choice) with a third category (domicile of dependence) applying to minors or those dependent on someone else.

Of course, anyone aware of UK news for the last decade will have read or heard about the controversy around the status of so-called ‘non-doms’.

These were usually very wealthy individuals who are resident in the UK but have another country of domicile.

As a result, they weren’t required to pay UK tax on assets outside this country unless they transferred some of those riches here and were, therefore, taxed on what was referred to as the ‘remittance basis’.

Crucially, they only had to pay IHT on those assets which they held in the UK.

Those people regarded as non-doms did have to be careful, though, in order to be reclassified as ‘deemed domiciled’ by HMRC following a rule change in 2017, something which could happen if they had been UK resident for 15 out of the previous 20 years.

If that happened, then their entire assets worldwide would suddenly be liable for UK IHT.

Figures published by HMRC on the same day as the latest Budget showed that the shift was so unpopular with those deemed domiciled that many were likely to leave the country (https://www.gov.uk/government/publications/evaluation-of-the-2017-change-to-uk-deemed-domicile-policy/evaluation-of-the-change-to-uk-deemed-domicile-policy-2017).

The same document contained evidence of why.

The Office for Budget Responsibility (OBR) reckoned that it would raise another £300 million in tax each year.

In fact, people deemed domiciled now contribute “£3 billion of Income Tax, Capital Gains Tax and National Insurance contributions each year”.

Non-dom status, often associated with foreign billionaires, was so controversial that it was regularly in the crosshairs of politicians.

Eighteen months before Rachel Reeves delivered her Budget speech, her predecessor as Chancellor, Jeremy Hunt, set out how the position of non-dom would be phased out over four years from this year, with former non-doms thereafter having to pay taxes on their foreign income and gains (FIGs) at the same rates as everyone else.

Labour’s General Election manifesto in 2024 went even further, pledging to “abolish non-dom status once and for all” (https://labour.org.uk/wp-content/uploads/2024/06/Change-Labour-Party-Manifesto-2024-large-print.pdf).

Instead of domicile, a new residence-based regime came into force from the start of April this year (https://assets.publishing.service.gov.uk/media/672105124da1c0d41942a8a8/Reforming_the_taxation_of_non-UK_individuals.pdf).

As a result, non-dom or deemed domicile status “will no longer be of any relevance”.

Instead, someone’s assets fall liable for UK IHT if they have been resident in the UK for 10 out of the last 20 years.

It is possible to fall outside the reach of UK IHT but only if an individual has been non-UK resident for between three and 10 consecutive tax years.

The changes have understandably caused headaches for British people, similar to many clients of myself and my colleagues, who have spent time living and working overseas but either wish or have to return back to the UK.

Transition rules have been put in place to govern the latest moving of the goalposts by HMRC, stating that the old process applies until people have fully immigrated and the new rules take effect.

Many of those who became expat for reasons of leisure or labour and now wish to be back in Britain have neither the great wealth of overseas oligarchs or the sophisticated financial arrangements which often go hand in hand with them.

They just want the certainty that going back to a Britain which they call home won’t see them tripped up by the taxman’s red tape.

For that reason and for anyone in that situation, it is important to understand what the new rules are and how they may apply.

It is essential, therefore, to seek the advice of an estate planning specialist in determining not only what someone may have in assets – and where they may be – but what potential IHT liabilities there are.

Since last October’s Budget, we have found ourselves advising countless men and women returning to the UK from various parts of the globe.

As well as providing guidance on the legal implications of such a move, we work closely with financial planners to ensure that a homecoming is as tax efficient from an IHT perspective as possible.

Given that the amount of IHT claimed by the Treasury continues to increase (https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-monthly-bulletin), it literally pays to make such checks before practicalities or the lure of family and a familiar environment prove to strong to ignore.

This has been written by one of our Trainee Solicitor, Omair Aziz  Omair@privateclientsolicitors.co.uk. Please do contact him for any questions or queries that you may have.

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