This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website:
Introduction – Is Inheritance Tax due?
Calculating Inheritance Tax
Valuing assets
Responsibilities of personal representatives
Business relief and businesses
Discretionary trusts
Deceased left no will
Pensions
Agricultural relief
Deceased's liabilities
Foreign aspects
Joint property
Penalties
Settled property
Woodlands
Probate
Alter Inheritance tax
Gifts
Excepted estates
Paying IHT
Thresholds and Interest
Introduction
This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
It also gives advice about lifetime gifts and the taxation of discretionary trusts.
The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
- gifts into certain kinds of trusts
- the tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits
- the ending of an interest in possession during a beneficiary's lifetime
- the treatment of funds in alternatively secured pensions on death.
This article will be updated as necessary when the Finance Bill is enacted.
Tell me about domicile
Liability to UK inheritance tax depends on your domicile at the time you make the transfer.
Domicile is a legal concept. It is not possible to list all the factors that affect your domicile, but we explain some of the main points in this section.
You are domiciled in the country where you have your permanent home. Domicile is different from nationality or residence.
You can only have one domicile at any given time.
What is a domicile of origin?
Your 'domicile of origin' is normally acquired from your father when you are born. It may not be the country in which you are born. For example, if you are born in France while your father is working there, but his permanent home is in the UK, your domicile of origin is the UK.
What is a domicile of dependency?
Until you can legally change it by acquiring a domicile of choice, your domicile will be the same as that of the person on whom you are legally dependent. If that person's domicile changes, you automatically acquire the same domicile in place of your domicile of origin. This is known as a domicile of dependency.
What is a domicile of choice?
You can legally acquire a new domicile, a domicile of choice, from the age of 16. To do so, you must:
- leave the country in which you are now domiciled and settle in another country, and
- provide strong evidence that you intend to live there permanently or indefinitely.
Living in another country for a long time, although an important factor does not prove you have acquired a new domicile.
What do you mean by deemed domicile?
For inheritance tax purposes, there is a concept of 'deemed domicile'. This means even if you are not domiciled in the UK under general law we will treat you as domiciled in the UK at the time of a transfer if:
- you were domiciled in the UK within the three years immediately before the transfer, or
- you were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you make a transfer.
What were the old rules for married women?
Before 1974, when you married you automatically acquired your husband's domicile. After marriage this domicile would change when your husband's domicile changed. If your marriage ended, you kept your husband's domicile until you legally acquired a new domicile.
Since 1 January 1974, your domicile is not necessarily the same as the domicile of your spouse or civil partner. We decide it by the same factors as for any other individual who is able to have an independent domicile. But, if you are a woman who was married before 1974 and had acquired your husband's domicile, you retain this after 1 January 1974 until you legally acquire a new domicile.
Which assets are taxable in the UK?
Generally, if you are domiciled, or deemed to be domiciled, in the UK, inheritance tax applies to your assets wherever they are situated.
If you are domiciled abroad, inheritance tax applies only to your UK assets. However, if you are domiciled abroad there is no charge on excluded assets and we may remove certain other types of UK assets from the tax charge.
How do I know where assets are situated?
This is decided according to general law, but subject to any special provisions in a double taxation agreement. The normal rules for the more common types of asset are that:
- rights or interests in or over immovable property and chattels are situated where the property is located;
- coins and bank notes are situated wherever they happen to be at the time of the transfer;
- registered shares or securities are situated where they are registered;
- bearer securities are situated where the certificate of title is located at the time of the transfer;
- goodwill is situated where the business, to which it is attached, is carried on;
- an interest in a partnership is situated in the country whose law governs the partnership agreement;
- debts are situated where the debtor resides;
- bank accounts are situated at the branch where the account is kept.
Tell me about settled property
Inheritance tax applies to settled property in the UK. It does not apply to settled property outside the UK, unless the settlor was domiciled, or deemed to be domiciled, in the UK when the property was settled.
The deemed domicile rules do not apply to a taxable reversionary interest in settled property. Inheritance tax is not due if the reversionary interest is situated outside the UK, and the person beneficially entitled to it is domiciled outside the UK.
What is excluded property?
If you are not domiciled in the UK, we may treat the following types of asset as excluded property and no inheritance tax is chargeable.
Government securities
Certain British Government securities (also known as FOTRA securities) first issued before 30 April 1996 are exempt from tax if you are neither domiciled nor ordinarily resident in the UK. If the securities are settled property they are excluded property if:
- the individual beneficiary entitled to an interest in possession in them is neither domiciled nor ordinarily resident in the UK, or;
- if there is no interest in possession, all past, present and future potential beneficiaries are neither domiciled nor ordinarily resident in the UK.
For these purposes, domicile means domicile only under general law. The deemed domicile provisions do not apply.
For FOTRA securities first issued after 29 April 1996 new conditions apply which mean that your domicile is not relevant. You only need to be not ordinarily resident in the UK to benefit from the exemption. From 6 April 1998 the new conditions apply to all British Government Securities, except 31/2% War Loan 1952 or later. This also applies to securities that are settled property. If you want more information on FOTRA securities this link may be useful.
Authorised unit trusts and open-ended investment companies
Holdings in Authorised unit trusts (AUTs) and Open-ended investment companies (OEICs) are excluded property if held by an individual not domiciled in the UK or if held in a trust made by a settlor not domiciled or not deemed domiciled in the UK when making the trust.
The Channel Islands or Isle of Man
If you are domiciled in the Channel Islands or the Isle of Man and hold National Savings Certificates and certain other forms of small savings, they are excluded property. The deemed domicile provisions do not apply.
Visiting forces and staff of allied headquarters
Emoluments and tangible movable property of members of visiting forces (other than British citizens, British Dependent Territories citizens or British Overseas citizens) and certain staff of allied headquarters are excluded property. For inheritance tax purposes, we will not take periods spent on duty in the UK into account in deciding whether a transferor is resident, domiciled or deemed to be domiciled here.
Overseas pensions
There are special rules about pensions paid to former employees of former colonial governments. On the death of a former employee any pension payable under Section 273 of the Government of India Act 1935, or an equivalent scheme under Section 2 of the Overseas Pensions Act 1973, is exempt.
We treat certain other pension payments and gratuities as being paid abroad and there is no inheritance tax due on the estate of a deceased pensioner who dies whilst domiciled abroad.
Foreign currency bank accounts
We exclude balances on non-sterling accounts with a bank or the Post Office from inheritance tax on death if they are held by:
- an individual not domiciled, resident or ordinarily resident in the UK, or;
- trustees not domiciled, resident or ordinarily resident in the UK on behalf of an individual with an interest in possession in the account, if the settlor was not domiciled in the UK when the settlement was made.
Settled property
Settled property situated outside the UK is excluded property if the settlor was domiciled outside the UK at the time the property was settled. Reversionary interests are also generally excluded property.
What are double taxation conventions (DTCs)?
DTCs are treaties (agreements) which help prevent you being taxed by two countries if both countries have the right to tax the same property when a death occurs or a gift is made. The UK has a number of bilateral DTCs for taxes on estates, gifts and inheritances.
How do DTCs work?
For the purpose of the agreement, DTCs allow:
- the country in which the transferor is (or in the case of a death, was) domiciled to tax all property wherever it is, and;
- the other country to tax only specified types of property, such as immovable property, in its territory.
If you still suffer double taxation, there are rules for deciding which country gives credit for the other's tax. Where, exceptionally, the relief given by a DTC would be less than that given by unilateral relief we give you the benefit of unilateral relief. Follow this link for more on unilateral relief.
With which countries does the UK have DTCs?
The following DTCs apply to inheritance tax:
Country Date of entry into force Statutory Instrument No.
Republic of Ireland 2 October 1978 1978 No. 1107
South Africa 6 May 1979 1979 No. 576
USA 11 November 1979 1979 No. 1454
Netherlands 16 June 1980 1980 No. 706
(amended) 3 June 1996 1996 No. 730
Sweden 19 June 1981 1981 No. 840
(amended) 14 July 1989 1989 No. 986
Switzerland 7 March 1995 1994 No. 3214
Treaties with France, Italy, India and Pakistan were in place before 1975 during the estate duty era and have different rules to eliminate double taxation.
You should consult the relevant DTC whenever necessary. The statutory instruments dated after 1987 are available on-line from the Office of Public Sector Information. Statutory instruments dated before 1987 are available from The Stationery Office Ltd.
What if there is no double taxation agreement?
If a transfer is liable to inheritance tax and also to a similar tax imposed by another country with which the UK does not have an agreement, you may be able to get relief under unilateral relief provisions.
What is 'unilateral relief' and how does it work?
We give credit against inheritance tax for the tax charged by another country on assets situated in that country. For this purpose, UK law determines the location of the asset. If the tax that is charged on the asset by the other country exceeds inheritance tax on that asset, we limit the credit to the amount of inheritance tax.
We also give credit where both the UK and another country impose tax on assets that are situated:
- in a third country, or;
- both in the UK under UK law and in the other country under that country's law.
In these cases the credit is a proportion of the tax. The proportionate credit is computed by the formula:
A / (A + B) x C
A is the inheritance tax, B is the overseas tax and C is whichever of A or B is smaller.
If the UK and two or more other countries tax the same asset the above applies but with modifications.
Example
Ann is domiciled in Ruritania, but is also treated as domiciled in the UK. She makes a gift of property situated in Utopia.
Item Amount
UK inheritance tax (A) £3,000
Ruritanian inheritance tax (B) £1,000
C is the smaller of A and B £1,000
Credit against UK inheritance tax is
£3,000 / (£3,000 + £1,000) X £1,000 £750
Net UK tax £2,250
Example
Tom is domiciled in Utopia but holds shares in a Ruritanian company, which maintains a duplicate share register in the UK. Under UK law we regard the shares as situated in the UK, but Ruritanian law regards them as situated in Ruritania. Tom dies (but his estate is not liable to Utopian tax).
Item Amount
UK inheritance tax (A) £1,000
Ruritanian inheritance tax (B) £4,000
C is the smaller of A and B £1,000
Credit against UK inheritance tax is
£1,000 / (£1,000 + £4,000) X £1,000 £200
Net UK tax £800 | 
