The Unknown Unknowns: A Deep Dive into UK Domicile Rules and Inheritance Tax

Discover the ‘known knowns’, ‘unknown knowns’, and the ‘unknown unknowns’ in the realm of UK domicile rules and inheritance tax. 

This article by our International Tax expert Nici Goldsmith unravels the complexities of the proposed reforms by major political parties, the Conservatives and Labour, and their impact on non-UK domiciles. 

Will you be affected by these changes?  If so, you should consider seeking professional tax advice now.

A very famous quote from Donal Rumsfeld has it that there are known knowns, unknown knowns and unknown unknowns. Applying this to what we have been told by the major political parties about how they will treat non-domiciles going forward, and we have our known knowns – ish.  We know that both the Conservatives and Labour will reform the domicile rules to bring forward the point at which non-UK domiciles become liable to tax on their worldwide income and gains.  We know that Labour will change the connections required to be liable to UK inheritance tax, and we know that the Tories will consult on this (a 'known unknown').

However, very little has been said about the other main group affected by the domicile rules ‘unknown unknowns’: those who have left the UK and are very settled and happy living abroad and who have no intention of returning to the UK.  If the domicile rules are changed, how will this affect those individuals?  Or even those who have left the UK but don’t intend for that change to be permanent, or who may move from say Hong Kong or Singapore to France, Spain or Portugal on retirement? Will the existing rules remain for those individuals? If you’re in this situation, it’s crucial to get expert tax advice, reach out to our International Tax expert.

At present, UK domiciles are liable to UK inheritance tax (IHT) on their worldwide assets, regardless of how long they have left the UK for.  It is possible for them to acquire a new domicile of choice in their chosen country.  They have to have moved and intend to remain in their new jurisdiction and not be able to foresee any circumstances under which they would move back to the UK.    In that case, they would have acquired a new domicile of choice and only any UK assets would be subject to UK IHT.  We know that such claims are often challenged by HMRC, and in cases where there are still significant ties to the UK (retention of the former main home, frequent visits to the UK, continuing UK connections) a change of domicile may be much harder to prove.

Will one knock-on effect of the proposed changes to inheritance tax for non-domiciles mean that any new rules will apply to all individuals leaving the UK, regardless of their original domicile?  So if anyone leaves the UK for at least 10 years, they will only be subject to UK IHT on their UK assets?  Or will we be more likely to see rules that are different for those with a UK domicile of origin leaving the UK than for those with a foreign domicile leaving the UK?  What happens if someone leaves for 10 years and then returns again?  Will someone with a UK domicile of origin immediately become subject to UK IHT, whist someone who has been here for 10 years, leaves for 10 years and comes back again have yet another 10 years outside the UK IHT net?

And how will all of these changes affect the various double tax treaties that the UK has on estate taxes?  Four of these treaties pre-date inheritance tax, and under those treaties, if an individual is domiciled in that particular jurisdiction (India, Pakistan, France and Italy), then non-UK assets are not subject to UK inheritance tax.  These treaties supersede UK law, overriding deemed domicile provisions.  But what happens when the connecting factor for UK IHT is no longer domicile, but residence?  Or will the governments allow these treaties to stand?  And what about the other six treaties?  These treaties also refer to domicile, not residence.  Will these treaties change, or simply become obsolete if domicile is no longer the connecting factor for UK IHT?

Have the different political parties considered these implications at all, or is this something they will need to scramble to think about if they win the election, when they need to consider the full impact of their proposals?  Here is a great example of 'known knowns', 'known unknowns' and 'unknown unknowns'.

If you have any concerns about how these changes might affect you, we strongly recommend seeking advice from a tax professional. We invite you to reach out,  let’s start a dialogue today:

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