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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Change of Domicile: Deemed Domicile

Even if a person is domiciled outside the UK under common law, two special rules apply to those who have emigrated from the UK or to those who have been resident in the UK for tax purposes for many years (IHTA84/S267). If either rule applies then, in most cases, we treat them as domiciled within the UK for Inheritance Tax purposes. So the definition of domicile for Inheritance Tax includes deemed domicile. For all other purposes, for example, succession, the general law applies. In addition, IHTA/S267A allows someone who is:

  • married or in a civil partnership and
  • not domiciled in the UK

to elect to be treated as if they were domiciled in the UK (IHTM13040).

The two special rules are the three year rule - IHTA84/S267 (1)(a) and the 17 out of 20 rule - IHTA84/S267 (1)(b):

The three year rule

For the rule to apply the taxpayer must have been domiciled in the UK both on or after 10 December 1974 at any time within the three calendar years before the relevant event (the death or gift).

The 17 out of 20 rule

For the rule to apply the taxpayer must have been resident (for Income Tax purposes) in the UK on or after 10 December 1974 and in not less than 17 out of the 20 years of assessment, ending with the year of assessment in which the relevant event falls. The year of assessment is a tax year, so it runs from 6 April to 5 April.

Example 1

Paula has an English domicile and lives in England. She retires from work and decides that she wants to live for the rest of her life in Spain. She goes to Spain and takes a Spanish domicile of choice on 31 January 2007. She dies on 1 January 2010 still in Spain. Because of the deemed domicile ‘three year rule’ she is deemed domiciled in the UK at her death and her world wide estate is chargeable to IHT. Her estate can, of course, claim tax relief for any Inheritance Tax paid in another country.

Example 2

Bronislaw has a Polish domicile - He works in the UK and is UK tax resident. He has lived and worked in the UK since 2 February 1993 but he has always intended to return home to Poland. He starts to feel ill and returns home to Poland to be with his family on 8 April 2011 and unfortunately dies on 2 May 2011. Because of his common law domicile his world wide estate would not be chargeable to IHT. However the ‘17 out of 20’ tax year deemed domicile rule means that he is deemed to be domiciled in the UK at his death and his entire world wide estate is chargeable to IHT. His estate can, of course, claim tax relief for any Inheritance Tax paid in another country.

Example 3

Humberto is 70 - he has a Portuguese domicile but has been Tax resident in England since he was 20. He decides that he wants to move back to Portugal and he leaves the UK for good on 1 January 2007. On 2 January 2010 he makes a gift of £400,000 to a Gibraltar discretionary settlement from his Jersey Bank account. Without the deemed domicile provisions this would be a gift of excluded property.

However the ’17 out of 20’ year rule will apply to this transfer as Humberto was tax resident in the UK for part of the Tax year before he left the UK. There is no provision in the Income Tax Acts for splitting a Tax year in relation to residence, Humberto is assessed and charged Income Tax as if he was UK Tax resident for the whole year. As a result he was non-resident in 2007/08, 2008/09 and 2009/10 only and the transfer is caught by the 17/20 rule.

Trusts & Estates, Inheritance Tax follow any advice given by PTI Advisory with one qualification. For the tax years before 6 April 1993, someone was considered to be resident in the UK if they visited the UK during the year and had a dwelling house in the UK, which was available for their use. However, availability of a dwelling house was ignored for the purposes of our 17/20 rule (IHTA84/S267 (4)). In the absence of any information, you should assume that advice given by PTI Advisory for the purpose of Income Tax made before 93/94 was not made on the basis of this rule alone.

You should note that in the following exceptions, the deemed domicile rules, or an election to be treated as domiciled in the UK, do not apply:

  • Where domicile does not include deemed domicile.
  • When considering the double taxation agreements (IHTM27161) with France, Italy, India or Pakistan (though where there is a common law domicile in France, Italy, India or Pakistan, IHTA84/S267 can apply to chargeable lifetime transfers).
  • When deciding whether savings products in the Channel Islands or the Isle of Man are excluded property (IHTM27270)
  • When deciding whether government securities, are excluded property (IHTM27241).
  • When deciding whether property settled before 10 December 1974 is excluded property (IHTM27212).