Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving non-UK domiciled clients and the residence nil rate band (RNRB) for UK inheritance tax (IHT).
The tax query
‘Our clients are both non-UK domiciled and will remain non-UK domiciled under the new rules effective from April 2025.
Currently, they own their main residence, valued at £1,200,000, with no outstanding mortgage. They intend to sell this property and relocate to South Africa permanently.
Furthermore, they plan to allocate £650,000 into a UK discretionary trust for the benefit of their children and grandchildren. The remaining £550,000 will be invested in shares within the UK.
In addition, they own a property in South Africa valued at £400,000, which will serve as their main residence upon their return to South Africa.
They intend to gift this property to their children upon the second death. On the first death, they will leave their respective shares of the estate to one another.
My question is as follows: will the executors in the UK be able to claim the residence nil rate band, given that they own a main residence in South Africa?
Taxation readers’ views would be much appreciated.’ Query 20,500 – Peripathetic.
Terry Jordan’s reply: Check whether the clients are long-term residents of the UK.
‘Peripathetic says that his clients are non-UK domiciled and will remain so under the new rules from April 2025. For inheritance tax purposes, domicile is now only relevant in the context of the double taxation conventions (the UK does have one with South Africa to which reference should be made). What now matters is whether the clients are long-term residents (LTRs) of the UK by virtue of being tax resident here for ten out of the last 20 years. On leaving the UK they may have a tail of up to ten years of full exposure to inheritance tax depending on how long they have been UK resident.
Once outside the LTR provisions the scope of inheritance tax would be limited to UK situs assets (and to UK residential property regardless of how enveloped). Accordingly, at some point the property in South Africa will fall out of scope of UK IHT as excluded property. In simple terms the residence nil rate band provisions in IHTA 1984, s 8D et seq apply if a residence forms part of the estate of a deceased. Section 5(1)(b) provides that the estate does not include excluded property. Accordingly, as the property in South Africa is to be closely inherited on the second death the residence bands could apply if the property is liable to IHT. When relevant, excluded property is ignored when considering if the taper provisions for estates worth more than £2m are in point.
If the clients live long enough – their transfers to the discretionary trust will be on their IHT clocks for seven years – the taxable estate here comprising the shares may be below two nil rate bands. If not, downsizing relief could be claimed on the basis that the taxable estate will include part of the proceeds of sale of the UK residence.’
The full article was published in Taxation magazine (issue 4981) and is available to subscribers here on the Taxation website.
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