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HMRC internal manual

Inheritance Tax Manual

Domicile: Finance (No 2) Act 2017 changes: formerly UK domiciled and currently UK resident

This new rule applies to individuals born in the UK with a UK domicile of origin who leave the UK but later return.

Example 1

Brenda is born in Manchester, England in 1955. She has a UK domicile of origin. In 1980, at the age of 25 she moves to Singapore for work and remains there until her retirement at age 65. She acquires a domicile of choice of Singapore. She settles non-UK assets into trust in June 2012 at the age of 57.

In 2020/21 she returns to the UK and is UK resident from 2020/21 onwards. A ten-year anniversary charge on the trust potentially arises in June 2022. Brenda is UK resident in 2022/23 and was UK resident in 2021/22 (and 2020/21). Although the settled property was excluded property (IHTM04251) at the time of settlement, a ten-year anniversary charge arises in 2022. However, because the property remained excluded property until Brenda became a formerly domiciled resident (FDR) on 6 April 2021 relief will be available for nine years of the ten.

Note that this is so even if Brenda had re-acquired a common law UK domicile; she is still within the definition of a FDR and so the new rule applies.

Example 2                        

Carl is born in the UK while his Norwegian father is working for a UK geophysics company. His father never loses his Norwegian domicile of origin. Therefore Carl does not have a UK domicile of origin. As such, he cannot be a FDR even though he was born in the UK.

Carl lives in the UK for the first 25 years of his life but then goes to live in the USA, and acquires a US domicile of choice. Later, he settles his Swiss bank account savings into trust. He returns to the UK when he retires aged 65, intending to live permanently in the UK. The trust property was excluded property when settled and remains so. Carl was US domiciled at the time of settlement and even though he subsequently acquires a UK domicile of choice, the trust property remains excluded property and outside the scope of UK Inheritance Tax (IHT). Note that if Carl did have a UK domicile of origin then the foreign settled property would not be excluded property while he is a formally domiciled resident.

Example 3

Denise is born on holiday in Spain to UK born and UK resident and domiciled parents. She moves to Greece at the age of 48 and acquires a Greek domicile of choice. She settles her portfolio of Greek let properties on a discretionary trust at the age of 62. She then returns to the UK and dies at the age of 84. Although her own estate will be taxable because she would be UK domiciled (actual or deemed) the trust property remains excluded property because she was born abroad and cannot therefore be a formerly domiciled resident.

There is a trust protection measure. No trust exit charge applies when a settlor who had been a formerly domiciled resident becomes non-UK resident again, as shown in the following example.

Example 4

While Brenda – see example 1 – is a formerly domiciled resident the settled property is relevant property. If she leaves the UK on 1 May 2024 then any foreign property would become excluded property on 6 April 2025. That would normally trigger an exit charge (because property has ceased to be relevant property). However, the existing trust protection would not apply because no trust property has moved abroad. The new rule ensures that no exit charge arises solely because Brenda is no longer UK resident.

There are two special rules that apply to trusts containing relevant property when

  1. there is an initial qualifying interest in possession in favour of the settlor (or spouse or civil partner) which then becomes a relevant property trust  and
  2. when property moves between two trusts.

At the time when the rules apply there is an additional domicile test. This additional test now requires the settlor or deemed settlor not to be a formerly domiciled resident if excluded property status is to continue, as shown in the following example.

Example 5

Carlos is domiciled in Spain and created a Jersey trust in 1994 in which he had an interest in possession. He married his second wife Cindy in 1995. Cindy was born in London with a UK domicile of origin but acquired a domicile of choice in Spain. Carlos died in 2015 and the fund continued on interest in possession trusts for Cindy. In 2016, Cindy moved to the UK temporarily and retained her Spanish domicile. In 2020, while Cindy was still resident in the UK the trustees end her interest and the trust continues on discretionary terms. Although there is no charge on either of these events (excluded property) the fund is not excluded property on the anniversary in 2024 – even if she is non-resident - because Cindy was a formerly domiciled resident when the trustees ended her interest in possession in 2020/21.

Trust income is deemed to be relevant property at the time of a 10-year anniversary if it had been retained for more than 5 years. But, that rule does not apply if the settlor was not UK domiciled when the trust was made and the property representing that income is held outside the UK. That saving rule no longer applies if the settlor is a formerly domiciled resident, as shown in the following example.

Example 6

Edward is a trustee of a discretionary trust and has retained the trust income. The income has not been capitalised by being accumulated. The income is deposited in a Jersey bank account. At the 10-year anniversary the settlor of the trust is a formerly domiciled resident and so none of the trust capital can be relevant property. In addition, the income held in the Jersey account is relevant property if that income arose more than 5 years previously.