Fortunately in Australia we do not have inheritance tax. But you may be surprised to learn that if you die in Australia holding UK situated assets, your estate still could be caught by UK inheritance tax. This article is the first in a series about UK inheritance tax.
The UK levies inheritance tax on people who aren’t from the UK, but only in relation to assets that are physically situated in the UK. Every person benefits from a nil rate band for UK inheritance tax purposes, which means that the first £325,000 GBP of assets (about $676,000 AUD) are not subject to inheritance tax. But if, for example, you own a flat in London or have a substantial portfolio of UK listed shares, and they are worth more than £325,000 GBP, your estate could be liable for UK inheritance tax on your death.
UK inheritance tax is levied on the basis of whether you are UK domiciled for UK inheritance tax purposes. If you are UK domiciled on your death, your worldwide assets will be assessed to UK inheritance tax. If you are not UK domiciled, your assets situated in the UK will be liable to UK inheritance tax on your death, but your assets elsewhere in the world will not be subject to UK inheritance tax.
‘Domicile’ is a term used to describe the country in which you have your permanent home. You inherit your domicile from your parents (usually your father) at birth, which is called a ‘domicile of origin’. Your domicile will follow that of your parents until you reach the age of 16, and if your domicile changes before age 16, this is called a ‘domicile of dependency’. After the age of 16, if you move to another country, you can acquire a ‘domicile of choice’ in the new country.
Domicile is a complex area and the tax law definition of domicile is different in the UK than in Australia (just to confuse matters).
Put simply, you will be Australian domiciled if:
- Your parents are Australian;
- You were born and raised in Australia until at least age 16; and
- You still retain a permanent home in Australia or an intention to return to Australia as your long term home.
The current UK inheritance tax law states that you can become ‘deemed domiciled’ in the UK for UK inheritance tax purposes, if you are a UK tax resident for 17 out of the last 20 tax years. The UK government plans to change the law so that you will be ‘deemed domiciled’ in the UK, after you are UK tax resident for 15 out of the last 20 tax years. Therefore, if you were born in Australia, but you have been a UK tax resident for 15 years or more, you may shortly become UK domiciled for UK inheritance tax purposes.
You will be UK domiciled if:
- Your parents are British;
- You were born and raised in the UK until at least age 16; and
- You still retain a permanent home in the UK or an intention to return to the UK as your long term home.
You will also be UK domiciled if you have left the UK for an indefinite period, but have not established a home in another country. The UK government also plans to change the law so that you if you are a UK tax resident and you were born in the UK; you are always treated as UK domiciled for inheritance tax purposes.
Under UK tax law, you can change your domicile by moving to another country, but the onus is on you to prove that you have changed your domicile. In practice, changing your domicile can be difficult. If you want to change your domicile to avoid UK inheritance tax, you should seek professional tax advice.
Some exemptions for UK inheritance tax exist, for example, if you leave all of your assets to your spouse and you are both originally from the same country, you will not pay UK inheritance tax on the transfer of assets to your spouse. Generous reliefs exist for most businesses and farms. In addition, the UK government has introduced partial relief for the family home with effect from 6 April 2017.
UK inheritance tax can be reduced legally through tax planning. I am a UK chartered tax adviser, inheritance tax expert and have worked as a senior tax manager with a major accountancy firm in the UK. I am now a tax consultant at Nexia Duesburys in Canberra. If you are concerned that you may be caught to UK inheritance tax, please contact me on 02 6279 5400 or email me at firstname.lastname@example.org.