Introduction

Inheritance tax is a subject that often sparks debates and discussions, particularly among individuals with substantial assets and estates. 

For non-domiciled individuals residing in the United Kingdom, navigating the complexities of inheritance tax can be a difficult task. With the changing regulations and evolving tax laws, it becomes crucial to understand the implications of inheritance tax for non-domiciled individuals in the UK. Continue reading this article that represents a short guide on the inheritance tax for non-domiciled individuals in the UK. 

Non-Dom status and its influence on taxes

First of all, it is essential to define what non-domiciled status means. In the UK, an individual’s domicile is usually the country considered to be their permanent residence, a concept that weighs heavily in determining a person’s tax liability. 

Non-domiciled individuals are people who have chosen to live in the UK without considering it their permanent residence or who have their roots in a different country. For those, the UK tax system provides specific inheritance tax rules and considerations.

Furthermore, it is important to highlight that the domicile status, generally where a person has permanent residence, has an impact on taxation.  On the other hand, non-UK domiciled individuals have the option to be taxed only on UK income and capital gains, along with any non-UK income or profits remitted to the UK. This is called the remittance basis of taxation. 

In fact, the domicile also has an impact on an individual’s exposure to UK Inheritance Tax (IHT) on his/her worldwide assets, subject to the availability of reliefs or exemptions. As a rule, an individual who is not domiciled in the UK is subject to UK IHT only on his/her UK assets. 

The latest changes to the regulations and the recent negative press on the subject have only made it even more mandatory to consider your domicile location and plan carefully.

Definition of ‘deemed domicile’ and its impact on IHT

Non-dom status has been reduced since 2017 when HMRC introduced the concept of deemed domicile. This acts so as to treat an individual as domiciled in the UK for all tax purposes once he or she has been resident in the UK for 15 of the previous 20 years, independently of their actual common law domicile status.

By becoming UK-domiciled, a non-UK citizen will be significantly exposed to IHT in the UK as his or her overseas assets will fall within the scope of IHT and will be subject to a 40% tax on death.

It should be emphasised that non-domiciled individuals who are close to the ‘cut-off date’ for establishing their deemed domicile should consider what steps should be taken now to help reduce their exposure to UK income tax. 

These measures could involve donations, the use of trusts or leaving the UK for a certain period of time.

Inheritance tax

Inheritance tax is a tax charged on the value of an individual’s assets in the event of his/her death. 

Thus, in the case of UK-domiciled individuals, their global assets are subject to inheritance tax. 

By contrast, for non-domiciled individuals, the scope of inheritance tax is more restricted. The tax only applies to their UK assets and excludes their non-UK assets from the calculation.

One of the significant advantages for non-domiciled individuals is the concept of the remittance basis of taxation. This means that if they choose to be taxed on a remittance basis, they are only liable to pay UK tax on income and gains that are brought into the UK. In the same context, it allows them to keep their non-UK income and gains outside the scope of UK taxation, thereby potentially reducing their inheritance tax liability.

It is however important to note that the remittance basis has its limitations. Non-domiciled individuals who have been resident in the UK for a number of years may be subject to tax on remittances. 

This tax is an annual charge imposed on individuals who have been resident in the UK for at least seven of the last nine tax years. By paying the tax, they can continue to use the remittance basis for tax purposes.

Strategies to minimise the non-doms’ tax burden

When it comes to inheritance tax planning, the non-domiciled individual should consider exploring some strategies to minimise the tax burden. 

• The trusts

One commonly used method is to set up trusts. Through this method, individuals can transfer their assets into a separate legal entity, thereby reducing the amount of their estate subject to inheritance tax. Trusts offer flexibility and control over assets while providing a means to pass on wealth to future generations.

• The spouse exemption

Non-domiciled individuals should also explore the option of utilizing the spouse exemption. This particular exemption allows assets to be passed between spouses or civil partners without incurring any inheritance tax liability. 

By structuring their estate planning in a manner that takes advantage of this exemption, individuals can ensure that their wealth is preserved for the benefit of their loved ones.

• The professional advice

Furthermore, seeking professional advice from tax specialists and financial planners is crucial for non-domiciled individuals. With the intricate nature of inheritance tax laws, experts can provide tailored guidance and solutions based on an individual’s specific circumstances. They can help navigate the complexities of the tax system, identify potential pitfalls, and develop a comprehensive strategy to mitigate inheritance tax liabilities. 

Conclusion

In conclusion, we should say that inheritance tax for non-domiciled individuals in the UK requires a thorough understanding of the tax laws and regulations specific to this category. 

Non-domiciled status provides certain advantages, such as the exclusion of non-UK assets from inheritance tax calculations and the ability to use the remittance basis of taxation. However, individuals should consider different planning strategies, including trusts and the spouse exemption, to optimize their estate planning and minimize tax liabilities. 

Seeking professional advice is paramount to ensure compliance and make informed decisions. By staying informed and engaging in proactive tax planning, non-domiciled individuals can navigate the complexities of inheritance tax and protect their wealth for future generations.

Should you wish to discover more about the inheritance tax and potential charges under the status of a non-dom in the UK, do not hesitate to book a free consultation with our team now.

Feel free to contact us today for more information.