A Guide to Inheritance Tax

A Guide to Inheritance Tax
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Life in the 21st century is ever increasingly fluid as people move around the globe, whether it be for personal, business or other reasons.Such international mobility brings with it many different tax challenges - income tax, capital gains tax or inheritance tax (IHT). Here we focus on some fundamental IHT issues affecting assets owned at the date of death.IHT can also be payable on the value of certain lifetime gifts but these are beyond the scope of this article.

  • On what basis is IHT charged
The value of worldwide assets owned by an individual at the date of their death is potentially chargeable to IHT, if at the date of death that individual is ′domiciled′ in the UK. Subject to the deemed domicile rule below, where the deceased was not UK domiciled, it is only the value of UK assets which are potentially liable to the tax.
  • How do I know if I am UK domiciled
At the date of their birth, most people take on the domicile of their father, and their domicile follows that of their father until age 16 years. From that age the individual′s own pattern of living and long-term intentions will dictate their domicile. By way of a simple example, an individual born of an Indian-domiciled father will be regarded as having an Indian ′domicile of origin′ . If after age 16 that individual moves to the UK to live, and also intends to reside there indefinitely, even if not irrevocably, that person might take on a UK ′domicile of choice′.
  • What if I stay in the UK for a long time but I have never intended to remain in the UK indefinitely
There is a concept of ′deemed domicile′ for IHT only, which means that the value of worldwide assets owned by a non-domiciled individual are within the charge to UK IHT, even if the individual was not UK domiciled. For non-domiciles coming to the UK, this rule bites where the individual was UK income tax resident on or after 10 December 1974 and in not less than seventeen out of the twenty tax years ending with the one in which death occurs.A different deemed domicile rule applies to those who were previously UK domiciled and who claim to have broken their UK domicile.A potentially valuable exception to this deemed domicile rule can however apply where the deceased person's domicile was Italy, France, India or Pakistan.
  • Should action be taken prior to coming to the UK or before becoming deemed domiciled
Steps can be taken to provide protection from future IHT by establishing an offshore trust to hold assets, possibly via an offshore company. Assets held in such a structure can remain outside the scope of IHT even after the person establishing the trust has become UK domiciled or deemed domiciled.Even those individuals in the UK who have a domicile in the above jurisdictions should consider this planning, because it is not known how long these exceptions will continue to apply.It is also essential that other taxes, such as capital gains tax are taken into account when establishing such structures, because asset transfers can trigger taxable events.This is a complex area of UK tax law so no action should be taken without detailed tax advice.
Stephen Barratt is Private Client Tax Director at James Cowper LLP
The article is prepared as a guide. For specific advice, please email: sbarratt@jamescowper.co.uk
The above article was published in
India Inc′s
print edition of the
India Investment Journal
launched in April 2014 in conjunction with the
.

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