‍Wherever I Lay My Hat (That’s My Home)

We’ve all heard the song Wherever I Lay My Hat (That’s My Home) by Paul Young, but is it really as simple as that?

Unfortunately, when it comes to determining whether your worldwide estate will be subject to inheritance tax upon your death, HMRC takes a different approach.

Historically, and up until 6th April 2025, a domicile-based system has been used to determine the extent of inheritance tax payable upon a person’s death.

The concept of domicile is a common law one and is used, where a person has links to more than one jurisdiction, to establish which legal system will apply.

A person’s domicile is not necessarily the country in which they are living and is determined by reference to various legal principles to establish an individual’s ‘permanent home’.

Every person must have a domicile, and the starting point is a domicile of origin at birth, which is usually the father’s domicile at the time of the child’s birth but can be displaced by obtaining a domicile of dependency (whilst the child is under 16) or a domicile of choice which requires actual residence in a new country and an intention to permanently reside in that new country.

It has therefore previously been possible for an individual to live in the UK and either retain their domicile of origin or retain a previous domicile of choice, by evidencing that links to the previous domicile have not been severed and there is no permanent intention to remain living in the UK.

With the current inheritance tax rate at 40% of the worldwide taxable estate if domiciled in the UK at the date of death, there has been extensive litigation concerning the domicile of individuals at the date of death and the evidence required to support a domicile elsewhere because if it is agreed with HMRC that a person was not domiciled in the UK at the time of their death, then only the assets held in the UK will be subject to inheritance tax.

What does this mean for me?

To simplify matters and bring the UK in line with many other countries, particularly within the EU, the government has introduced a change to this system, effective from 6th April 2025. From this date, a residence-based system will be used to determine liability for inheritance tax. The test will be whether an individual has been resident in the UK for at least 10 of the last 20 years immediately preceding the tax year in which death (or another chargeable event) occurs.

This means that non-UK assets will only be subject to inheritance tax if the deceased individual qualified as a long-term UK resident by having lived in the UK for at least 10 out of the previous 20 years. If an individual leaves the UK, they will remain liable to pay inheritance tax for between 3 and 10 years, depending on the length of time they were in the UK before their departure.

The test for residency is statutory, and the rules can be complex. As a starting point, if a person has spent 183 or more days in the UK in any given tax year, they will be deemed resident in the UK for that tax year.

It is also worth noting that the UK has entered into several tax treaties with other countries to avoid double taxation where inheritance tax would be payable alongside an equivalent tax in another jurisdiction.

Conclusion

Where tax is concerned, wherever you lay your hat may not be where HMRC considers your home to be. It is always sensible to seek professional legal advice during your lifetime if these issues are relevant to your circumstances.

In particular, if you have been living in England and would have been treated as non-domiciled up until 6^th April 2025, perhaps because your father was not domiciled in England throughout your minority and you have maintained that status, you may now find that under the new rules you are resident in England and your worldwide estate is subject to inheritance tax.

Please do not hesitate to get in touch for further advice tailored to your specific situation.

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