Could the UK Taxman Still Come Knocking?

There must be some UK connection with either the property being transferred or the person making the transfer (or both) for Inheritance Tax to apply.

Inheritance Tax applies to all transfers of UK situated property. For example, any transfer of a London apartment (even one owned by a foreign company, following recent changes), or shares in an English company, falls within the scope of Inheritance Tax on the basis that the property is legally situated in the UK.

Inheritance Tax also applies to all transfers of assets, regardless of where they are legally situated, where the person making that transfer is UK domiciled at the time of the transfer.

If a person dies with a UK domicile – regardless of where they are living when they die (and regardless of where their assets are located) - the entire value of their worldwide estate is subject to UK Inheritance Tax at 40%.

The way that these complex rules apply to people who have not lived in the UK for years, or even decades, is often misunderstood. This leads to people taking steps that trigger large Inheritance Tax charges, which they then fail to report for many years, because they were not aware of the liability. Interest and penalties get added to the unpaid tax, making matters worse.

Long-term Barbados residents who started their lives in the UK may think they have waved goodbye to the UK taxman. In many cases they will be wrong. Shedding one’s tax residence is a simple matter of packing up and leaving, but changing one’s domicile is a much trickier affair. And it is domicile that is the relevant “connecting factor” for UK Inheritance Tax. UK Inheritance Tax applies to estates when someone dies and to certain lifetime transfers, including gifts, particularly gifts into trusts.

For the past decade, UK tax rules have treated gifts into most lifetime trusts as “chargeable transfers” for Inheritance Tax purposes, resulting in an immediate 20% tax charge on the value transferred (after the transferor’s “nil rate band” - currently £325,000 - is exhausted). A 40% rate applies on death.

The UK Inheritance Tax rules do not apply to all transfers taking place throughout the world and they do not apply to all deaths around the world; that’s where “connecting factors” come in.

The problem all comes down to this concept of “domicile”. In order for long-term Barbados residents, who started out in the UK, to properly plan their affairs it is important to fully understand what a “domicile of origin” is and how one can displace that domicile of origin with a “domicile of choice” somewhere else. The implications of doing this effectively can be the difference between paying 40% Inheritance Tax on everything you own, and not paying it, so it’s not an analysis that should be carried out without a detailed understanding of the rules.

For an expanded version of this article please visit: http://businessbarbados.com/taxation/barbados-expatsinadvertent-tax-charges/

For further information please contact: david.cooney@crsblaw.com