Well, the Romans also gave us ‘origo’ (not a delicious pasta dish but origin/domicile) – in other words, a place where you pay your taxes. Domicile of origin has developed since Roman times but, while the British still hold on to this notion tightly, other nations focus on nationality and citizenship.
Types of domicile
There are three main types of domicile: origin, dependency and choice – and just to make things even more complicated, there is also, for tax purposes only, deemed domicile.
If you are a foreigner living in the UK and are resident for 15 out of the last 20 tax years the UK is your deemed domicile. This means that your worldwide assets become subject to inheritance tax at a current rate of 40% after a paltry exemption.
Thankfully there are exceptions to being taxed at this high rate but first, how do we get our domicile?
A child usually takes their father’s domicile at birth unless the parents are not married, in which case it is the domicile of the mother that counts. Then, at the age of 16 in England and Wales, a child can choose another domicile – but strangely in Scotland, under the ‘emancipation of minors’, the age of choice was once 12 for girls and 14 for boys. Clear so far?
Is not always that simple. Women who married before 1 January 1974 took the domicile of their husband whatever country that was but after that date, on marriage they kept their own domicile. A British woman who married, say, an Australian before 1 January 1974 would keep her new Australian marriage domicile even if her husband then pre-deceased her – unless, of course, she decided to change it by choice.
This historical anomaly can prove an advantage tax-wise as Australia and other countries don’t have inheritance taxes. However, the US said no to this under the UK/US double tax treaty and an American woman is always deemed to have her original domicile, even if married to a Brit before 1 January 1974.
A UK-domiciled person who marries a foreigner is at a disadvantage as he or she can only transfer GBP 325,000 to their foreign spouse tax-free during their lifetime. Anything over that amount is a potentially exempt transfer but would be subject to a tax charge if the British donor spouse dies within seven years of the gift.
The foreign spouse can elect to be treated as UK-domiciled to prevent this tax charge as the normal inter-spouse exemption would come into play. Sound good? Well no, because on the foreign spouse’s death they are taxed on total worldwide assets, whereas before then tax was only imposed on their UK assets, if they had any UK assets. Care needs to be taken with such an election and of course expert advice can ensure tax is managed efficiently!
Know the new rules
Now, by another odd quirk of birth, two children born to a UK-domiciled father could have two different domicile treatments under the new rules brought in from 6 April 2017. Example: father Jack works abroad with his wife in Singapore and they have a son, John, born in the local hospital. A few years later, they are working in an African country when Jack’s wife becomes pregnant and for medical reasons, she returns to England where Nicholas is born. Each boy would appear to be treated the same for domicile – but no! Because John was born in Singapore under the new UK domicile rules, if he and his brother make Singapore their permanent home later in life, any return to the UK would have different consequences for each brother.
Say the boys must return to the UK from Singapore to look after their sick mother and, after being there a year and a half, all living in the family home, mother sets the house on fire accidentally one night and they all die. (It’s a tragic scenario, but thankfully entirely hypothetical!)
Under the new domicile rules, John’s estate would pay inheritance tax only on his UK asset, his half share in the burnt-down property. Nick’s estate however would pay UK inheritance tax on his half share of the burnt-down home in the UK and all his Singapore assets which, like his brother John’s, are substantial.
This difference is because Nick was born in the UK – he becomes re-domiciled the year after he returns to UK and his worldwide assets are taxable, while John would have had to be in UK for 15 years before that happened to him. So, by an odd quirk of fate, two brothers born of an English father, with domiciles of choice in Singapore but dying in the UK, are treated totally differently tax-wise.
Estate planning like Royalty
Now, what about an Englishman marrying someone from across the pond in America? Prince Harry and Meghan spring to mind. If Meghan predeceases Prince Harry and she leaves her assets to him, the US would impose estate taxes at 40%, there being no marital exemption where the receiving spouse is a foreigner. If both spouses are US citizens, a marital exemption applies. There is relief for US/UK marriages in the form of a US qualified domestic trust known as a qualifying domestic trust (QDOT), but its effectiveness is limited. Maybe this is why it is rumoured that Duchess Meghan is going to take the UK citizenship test.
So even those in exalted circles have to plan to reduce estate tax – and we have the Romans to thank for that!
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The information in this article aims to provide information. However, this is not intended to form professional advice nor should it be relied upon as such and before taking any particular action, specific and personal advice should be obtained. All levels and basis of, and relief from taxation illustrated here are subject to change. The Fry Group (Singapore) Pte. Ltd. Authorised to act as a financial adviser by the Monetary Authority of Singapore (MAS). License number FA100057-1.
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