This is a very brief guide to a very complex subject. Those professional advisers ‘in the know’ won’t need it, though one or two might have some observations to make. Others may find it helpful as an introduction which they can take further with their own advisers. A further layer of complexity, though it has to be said also with clarification, has come into effect from 6 April 2025, with implications for all of Income Tax, Capital Gains Tax and Inheritance Tax. It is Inheritance Tax which is of greatest interest for purposes of my book.
This Post falls into four parts:
A. a brief description of the concepts of residence and domicile and location of assets (situs), for UK law purposes;
B. a summary of the new current regime;
C. a summary of the regime applicable to the three taxes before 6 April 2025; and
D. two final comments.
A. Legal Concepts
Residence
The traditional rules which provided whether an individual is resident in the UK, typically by spending 183 days or more in the UK in a tax year (6 April – 5 April), were replaced from 2013-14 by the Statutory Residence Test. Each of three tests was applied in order, until a test was met so as to determine one’s status: the Automatic Overseas Tests, the Automatic UK Tests and the Sufficient Ties Test.
As from 2025-26 the new concept of ‘long-term residence’ applies, as described below. Within overall UK tax residency, an individual may be resident in Wales, in Scotland or in
Northern Ireland, rather than in England, whether for tax or for other purposes. Someone who is not UK resident pays tax only on income which arises in the UK, whether earned or unearned.
Domicile
The historic concept of domicile (which is distinct from nationality) refers to the country in which one has chosen to make their permanent home, under the general law. An individual acquires a ‘domicile of origin’ at birth (taking on usually the father’s domicile), which most people retain throughout their lives. However, an individual could establish an independent ‘domicile of choice’ by leaving their native land to settle permanently in the UK for example.
Again, while we are talking about UK domicile, an individual is strictly speaking domiciled in England and Wales, in Scotland or in Northern Ireland, all of which are embraced within UK domicile.
As described below, UK tax liability from 6 April 2025 is generally determined by residence rather than by domicile. That said, however, domicile (whether within or outside the UK) does remain important in determining which law applies in relation to the administration of a deceased estate. Here each country will have its own private international law rules.
Location of assets (situs)
The location of a house/flat or land goes without saying. Shares in a company or units in a unit trust will be located where the (principal or only) register of shareholders is kept. Other assets (‘movables’) will be located where they are physically situated from time to time, which might apply to paintings or jewellery and so on.
B. The Current Tax Position, from 6 April 2025
We now have the concept of ‘long-term UK resident’.
An individual will be a long-term UK resident in a particular tax year if they had been resident in the UK for 10 or more of the preceding 20 tax years, not necessarily continuously and including a situation where there are gaps between the years of UK residence. An individual who stops being UK resident having been resident in the UK for no more than 9 tax years out of the last 20 will never become a long-term UK resident. By contrast, once an individual satisfies the 10 out of 20 years test and becomes a long-term UK resident, they will remain so, as long as they stay UK resident, as also for a number of tax years on ceasing that status. For this purpose there is a complicated rule setting up what is commonly known as a ‘tail’ which refers to the number of tax years of non-UK residence which are needed to lose long-term UK residence status. The scope of that rule is beyond the scope of this Post.
There are also special rules for someone under the age of 20 and transitional rules for a previous non-UK domiciliary as at 30 October 2024 who became non-UK resident by 2025/26 and never became UK resident again.
Income Tax/Capital Gains Tax
An individual who is UK resident for a particular tax year will be subject to Income Tax and Capital Gains on worldwide income and gains. This is subject to a special rule for ‘New Arrivers’: those who are UK resident, but have not been UK resident for the previous 4 tax years, may claim the Foreign Income and Gains (FIG) relief for the first four years. They will pay UK tax on only their UK income and gains, with 100% relief on non-UK income and gains. Once the four year period is satisfied, worldwide income and gains will come into charge, subject to any available double tax relief.
Those who are not UK resident will pay UK tax only on UK source income and certain gains on UK situs assets.
Inheritance Tax
A person who is a long-term UK resident will be liable to Inheritance Tax on transfers of all assets whether or not situated in the UK. By contrast, anyone else will be subject to Inheritance Tax only on transfers of UK property.
There needed to be an application of the new regime to the spouse/civil partner exemption in the case where the donor spouse was actually or deemed UK domiciled, but the donee was neither. The previous capping at £325,000 continues where the donor spouse/civil partner is a long-term UK resident and the donee is not. This is subject to an irrevocable election for the recipient spouse to be treated as a long-term UK resident.
As to the special rules for settlements, so-called ‘excluded property settlements’ (that is, outside the scope of Inheritance Tax) have depended on the domicile, now residence, status of the settlor when the trust was made, which should be considered in detail. The good news is that where the settlor died before 6 April 2025, the transfer will remain an excluded property settlement, provided that the assets are situated outside the UK.
C. The Pre-6 April 2025 Tax Position
Income Tax/Capital Gains Tax
If an individual was resident and domiciled within the UK for tax purposes, then they would pay Income Tax and Capital Gains Tax on income and gains wherever in the world they arose, on a tax year to tax year basis. And any gifts of assets, wherever in the world they might be located, whether during lifetime or on death, might have been subject to Inheritance Tax.
Before a UK resident individual began to be treated as domiciled in the UK for tax purposes (see below), any income or gains arising outside the UK were free from UK tax, subject to making an election for the remittance basis, unless the income or proceeds of sale were remitted to the UK, in which case they were subject to UK tax. Once an individual had been UK resident for at least seven years, a remittance basis election could be made only if a payment of either £30,000 or £60,000 each year was paid, depending on the number of years they had been UK resident.
Inheritance Tax
If at the date of lifetime gift or death the individual was domiciled outside the UK and not deemed domiciled in the UK, assets situated outside the UK did not come into charge. There was a special ‘deemed domicile’ rule which applied for UK tax purposes (only) once they had become resident in the UK for at least 15 years out of the previous 20. For Inheritance Tax purposes only, where an individual left the UK, deemed UK domicile continued to apply until they had been non-UK resident for more than three calendar years.
Once deemed domicile (if not actual domicile) arose, Inheritance Tax was levied on a worldwide basis.
With someone who was not UK domiciled for UK tax purposes, a gift (whether during lifetime or on death) of property situated in the UK would come into charge (as also some interests in offshore entities holding interests in UK land).
D. Final Comments
A concluding observation on Wills – and double tax relief
If a UK domiciliary owns a house, apartment of other land abroad, it may well be sensible to have two Wills concurrently (ensuring that neither revokes the other!). So, for example, for a house in France, one would have a French Will governing the inheritance of that property (for which French Law rules would apply) and a UK Will which expressly covers property wherever in the world it may be other than in France.
In any event, it should be said that there will typically be relief from double taxation, typically under a Double Tax Treaty. For example, if a UK domiciliary owned a house abroad in a country which levied a 20% charge on death, that 20% will count as a credit towards the liability of up to 40% which is paid in the UK.
Tax Planning
There are certain well-established steps which can be taken year by year or on an ongoing basis to mitigate liability to UK taxes, even under the current regime. Here proper professional advice should be taken.
