Your Domicile status could impact your Inheritance Tax

Your domicile status could have an impact on two areas of Will drafting and inheritance tax planning:

  1. Which constituent parts of your estate are taxed under UK law; and
  2. The tax exemptions available to you and ultimately the final UK tax bill.

Under normal circumstances, any assets transferring to one’s spouse are fully exempt from UK IHT, but in cases where the surviving spouse has a foreign domicile, the exempt amount is only £325,000.  (This lifetime transfer – not just transfer on death – was increased from £55,000 in the Finance Bill 2013 receiving Royal Assent on 17/07/2013).  Additionally, they have a “Nil Band Allowance” of £325,000 (for 2024/25).  Hence any transfers over £650,000  will then be taxed at 40%.  In order to appreciate the significance of this, it is important to understand what is meant by domicile.  Domicile is a very complex concept in law but essentially there are four forms of domicile acknowledged in the UK: domiciles of origin, dependency, choice and also that of deemed domicile. A further and more detailed discussion of domicile can be found in our Briefing Note “Detailed Discussion of Domicile”.

For a more detailed discussion on domicile and its impact on inheritance tax together with a worked example see our Briefing Note “Domicile & IHT“.

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