Assets in the UK or are you from the UK? Inheritance tax and succession planning tips

There is no single definition of ‘domicile’ and it is generally established according to where you were born and follows that of your father at the time of your birth, assuming your parents were married. However, if an individual is British, but considers Australia to be their permanent or indefinite home, they may have acquired an Australian domicile of choice, although it will depend on the facts.

The difference is that if the individual still has a UK domicile of origin, they will potentially be liable to IHT on their worldwide estate (and anything they transfer into a trust can be caught too with a 20% IHT entry charge and 10-year anniversary and exit charges of up to 6%). However, if they have acquired an Australian domicile of choice or have an Australian domicile of origin, they will only be liable to IHT on their UK estate and anything they transfer into a UK trust.

Transfers between spouses are also exempt, provided they have the same domicile status. However, transfers to a non UK domiciled spouse (for example, to an Australian spouse), from a UK domiciled spouse are only exempt up to £325,000 unless the non-domiciled spouse elects to be treated as UK domiciled.

What to do about IHT planning

Some common strategies for individuals with an IHT exposure include:

• preparing a statutory declaration of domicile as evidence of Australian domicile of choice for Britons living in Australia who consider Australia to be their permanent or indefinite home and who have lived here for at least three UK tax years (so are not UK deemed domiciled under the three year rule), although Her Majesty's Revenue and Customs (HMRC) will still consider the facts, as domicile is a complex area of law;
• IHT effective lifetime giving – each individual is able to make:
  • £3,000 worth of gifts per year plus £250 to any number of individuals;
  • regular gifts out of income (which varies according to circumstances);
  • potentially exempt transfers (ie absolute gifts), which are exempt if the individual survives for seven years (with tapered rates applying in between);
• encumbering property liable to IHT with debt, as IHT is due on the net value of an estate, but complex rules apply to this now;
• making gifts to UK charities in a Will (which are IHT exempt); and considering if any properties qualify for Business Property Relief or Agriculture Property Relief.

What about estate planning?

If you own assets in the UK and Australia, it is important to consider whether to have Wills and the equivalent of enduring powers of attorney in the UK and Australia, or just one country.

Although an Australian Will is recognised in the UK and it is possible to have an Australian grant of probate resealed in the UK, this makes the administration of an estate more complicated and lengthier, as the Australian grant of probate needs to be obtained first. Having separate Wills mean you can obtain probate concurrently to save time.

For this reason and to ensure both Wills work best from a local tax planning perspective, it is best practice to have Wills in the UK and Australia (which must be carefully drafted to ensure that one does not accidentally revoke the other) particularly where an individual owns significant assets in both countries.

Even if an individual decides to only have one worldwide Will, it is also important to have the equivalent of an enduring power of attorney in the UK (known as a lasting power of attorney), as an Australian enduring power of attorney will not be recognised in the UK.