Domicile Confusion Could Result In Unplanned IHT
A leading Island tax advisor has warned that many businessmen and women currently working in the Isle of Man could be unintentionally within the scope of UK Inheritance Tax (IHT) – because they haven’t grasped the difference between tax residence and tax domicile.
UK IHT potentially applies just as much to Manx born residents holding UK investments as it does to those originating from the UK.
That’s the stark message from Kevin Loundes, Associate Director at Abacus, one of the Island’s longest established corporate service providers, where he heads up the firm’s dedicated, in-house tax team, providing comprehensive tax services.
“Simply ceasing to be tax resident in the UK isn’t the same as relinquishing a UK domicile. It’s an individual’s domicile position which is the key to establishing whether there’ll be a UK IHT liability on death,” explained Kevin, who has a wealth of experience advising high net worth individuals on residence and domicile issues.
“If an individual relocating to the Island were to displace a UK domicile of origin with a domicile of choice in the Isle of Man, it could result in considerable UK IHT savings.”
The key to UK IHT is an individual’s domicile at the time of their death and domicile is a very different concept from tax residence. “You may have moved from the UK and been living and working in the Isle of Man for many years, but that doesn’t automatically mean you’re no longer UK domiciled and free from the clutches of UK IHT,” he observed, adding that “people born in the Isle of Man may also not be totally free from UK IHT if they hold UK assets, such as property or shares in UK companies.”
Current UK IHT legislation has a nil rate band up to £325,000 on an estate. Anything above that figure is potentially taxed at 40%. By comparison, there is no IHT in the Isle of Man.
Kevin continued: “Briefly, each person is born with a domicile (a domicile of origin). An individual’s domicile of origin continues throughout their life, but may be displaced by a domicile of choice. As such, if an individual relocating to the Island were to displace a UK domicile of origin with a domicile of choice in the Isle of Man, it could result in considerable UK IHT savings,” he said. “In this scenario, simple tax planning could be undertaken to protect any UK assets (other than UK residential property) from UK IHT, without the need to sell such assets.”
“Proving an individual’s intention is notoriously difficult and requires significant evidence.”
“Adopting an Isle of Man domicile of choice would, generally, require an individual to relocate to the Island with an intention to remain on the Island permanently or indefinitely and to reside here as an inhabitant. Proving an individual’s intention is notoriously difficult and requires significant evidence,” said Kevin.
The onus of proof rests with the taxpayer or the executor of the estate – and not HMRC. “So individuals should take steps to ensure family members or executors are aware of evidence supporting a non-UK domicile claim in the event of HMRC challenge,” Kevin advised.
He also pointed out that changing your domicile to the Isle of Man from the UK wouldn’t bring immediate respite. In the eyes of the UK tax authorities, a person would still be deemed UK-domiciled for a further three years.
“It can be tricky demonstrating evidence of intention and, given someone’s estate would continue to be subject to UK IHT even if they died within that initial three-year period, it can really pay to consider the issue of domicile alongside the location of an individual’s assets sooner rather than later,” he concluded.