February 17, 2021

The deemed domicile end of tax year countdown

Women doing taxes

What is deemed domicile?

Deemed domicile applies when you’ve been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year.

All UK tax years of residence must be counted including:

  • Tax years under the age of 18; and
  • Any tax year split into a UK and overseas part should be counted as a year of UK residence; for example, if you depart from or arrive in the UK during a tax year. This means that you may have been resident for only 13 years but 15 tax years. This is a very important point which can catch out the unwary and their advisers.

Why does this matter?

Deemed domicile planning presents an extraordinary opportunity to create protected trusts and enjoy the resulting income tax and capital gains tax deferral advantages and continued inheritance tax protection for the overseas assets.

Settle £1m and you instantly have the potential to save £400,000 in tax. There’s next to nothing not to like.

How do I make sure the planning works?

  • Be certain of the number of years of UK residence.
  • Start exploring the options early. Don’t leave the planning to the last few months.
  • Source the correct advisory team in the UK and in the non-UK jurisdiction.
  • The value and constitution of the assets to be settled into trust needs careful thought in the context of a realistic assessment of your expected lifestyle and foreseeable expenditure.
  • Fully understand the different types of trust companies and where you may be able legitimately exercise control without negatively affecting the structuring.

What happens if I become deemed domiciled?

The fundamental consequence is that your overseas assets will be subject to the UK inheritance tax regime.

The income tax and capital gains tax referral advantages will also be lost.

A last warning to heed – beware formerly domiciled residents

Since 6 April 2017 there is a new category of deemed domicile, the formerly domiciled resident (‘FDR’).

The FDR category applies to individuals born in the UK with a UK domicile of origin, who have acquired another domicile and then become resident in the UK. The new rules will ensure that their foreign property and the property that they settled when they were non-UK domiciled will be within the scope of inheritance tax while the individual is UK resident, as long as they were UK resident in at least 1 of the 2 years prior to the year in which any inheritance charge arises.

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