Protecting your child from UK taxation at expense of your child’s British citizenship

One of the outspoken problems that are typical for overseas UHNWI who start a family in the UK is the ultimate concern for the potential UK inheritance tax to their children if they become or are born British and remain resident in the UK.

The concern here is an immediate assumption that acquisition of British nationality leads to greater taxation for their infants.

This misconception is even more of a problem post-Brexit as now EU/EEA/Swiss nationals are required to have the necessary UK immigration status to live in the UK.

It is no longer possible for EU/EEA/Swiss nationals to come to the UK and spend as much time as they like without having to face UK immigration control and restrictions.

Therefore, if you are originally from a country where there is no succession or inheritance tax in the legal system, you may want to go out of the way to avoid this tax liability in the UK as much as practically possible.

Not Choosing British citizenship for your child even when your child is born British

One of the popular misguided attempts to avoid potential UK taxation is by deciding not to apply for British citizenship for your child even if the child is born British.

This choice deprives your child of what rightfully belongs to the child, the birth right of your child. A decision such as this one may lead to many complications in the future for the child.

For one, the child needs to have the right immigration status in order to live in the UK. Therefore, another misguided popular approach is to try to process a visa application of some sort in lieu of the child’s British passport.

I can not even begin to describe how many legal and immigration unnecessary complications this course of action may create for your child.

Why is this approach wrong and how do UK tax rules work?

The number one issue with this approach is that unlike the USA, UK tax rules are not based on your nationality or UK immigration status.

The UK tax system is complex. However, it does attempt to be fair and nuanced to meet a number of distinct personal circumstances.

Here are some important concepts of UK Inheritance tax rules (IHT).

Domicile is the most important legal concept in UK tax rules

Domicile is a distinctive legal concept under English law. Effectively, it means the place of your origin and your permanent home. 

Therefore, if you are currently living in the UK, but originally are from overseas, the idea is that you are temporary in the UK and you have not acquired your British domicile.

A number of UK tax rules were updated in 2008, to allow a special tax treatment for individuals whose permanent home is not in the UK. These individuals are called non-doms, in short. 

They continue to be non-domiciled in the UK even if they have been long-term residents in the UK. They are popularly known as non-dom res (non-domiciled residents).

The three types of domicile under English law

There are three types of domicile under English law.

Domicile of origin. Domicile of origin is acquired at birth. The purpose of this domicile is to attach a person to a particular legal system.

Domicile of dependence. Domicile of dependence applies to children. It also applied to married women until 1 January 1974. Domicile of dependence also applies to persons suffering from a mental disorder.

Domicile of dependence is attached to the father or the husband, historically, in the case of married women.

Therefore, the child (the minor) will always have the father’s domicile if the child was born in a marriage.

Illegitimate children acquire the domicile of their mother. Adopted children acquire the domicile of their adoptive parents.

Overseas nationals are able to pass on their overseas domicile to their children even if they are born in the UK and acquire British citizenship by birth.

Therefore, it is completely unnecessary to frustrate the process of acquiring British citizenship for children born in the UK to parents who are resident or not resident in the UK, but continue to be domiciled overseas.

Domicile of choice. Domicile of choice suggests that an individual of sound mind and adult age is capable of changing their domicile of origin. There are a number of different factors that may come into play when deciding the domicile of choice.

However, the domicile of choice is only relevant to persons of British (England, Wales, Northern Ireland and Scotland) domicile to shake off their British domicile for UK tax purposes, namely, Inheritance tax.

It will suffice to say that English courts are not very receptive to this line of reasoning and a number of different requirements will need to be met to successfully claim the change of English domicile and avoid UK Inheritance tax on worldwide assets.

Recent changes to UK Inheritance tax rules in order to tax overseas individuals living in the UK

UK tax rules were amended in 2008, in order to make it possible for the UK tax authorities to tax long-term resident individuals who live in the UK.

There were many generations born in the UK who were able to avoid UK Inheritance tax (IHT) by claiming their domicile of origin was outside the UK.

Some rules were brought about to make it easier for UK tax authorities to bring individuals domiciled overseas into the remit of UK taxation.

The concept of deemed domicile

The concept of deemed domicile was brought about to determine when individuals who have an overseas domicile can be taxed for IHT purposes by the UK.

The current rules state that an overseas person (a person who has an overseas domicile) resident in the UK becomes deemed to have British domicile when this person is resident in the UK for 17 out of 20 years.

It is very important to plan your UK tax considerations before you choose to relocate to the UK full-time or decide to invest in the UK or buy assets in the UK or want to simply spend more time in the UK.

Introducing Statutory Residence Test to help determine the tax residence for an individual

In 2013, the UK adopted an extensive Statutory Residence Test (SRT) which helps to determine whether a person is a tax resident or not resident in the UK for a particular tax year.

SRT is quite comprehensive set of rules that helps to determine whether a person is:

• Automatically tax resident in the UK;
• Automatically not tax resident in the UK;
• In borderline scenarios, a set of time spent and different ties acquired to the UK, help to determine whether a person is or not tax resident in the UK. It is called a sufficient ties test.

UK tax residence, IHT and bilateral tax treaties to avoid double taxation

The UK is a party to the network of 200 bilateral tax treaties that seek to avoid double taxation. Therefore, depending on your particular circumstances you may be deemed resident, non-resident or dual resident in the UK in accordance with the provisions of a particular bilateral tax treaty.

It should be noted that there are under a dozen of bilateral tax treaties that address UK IHT liability issues.

Why should you not deprive your child of British citizenship for UK tax purposes and why does it not work?

Even if you are based overseas, your child born in the UK may acquire British citizenship by birth depending on the British citizenship or UK immigration status based on one of their parents.

It is ill-informed to believe that the acquisition of British citizenship automatically attaches the unwanted UK tax status to your child. The truth is that in the UK the UK tax status is attached to an individual’s residence and domicile and not to the citizenship or British passport.

Your child may be a British citizen, but not UK domiciled and therefore, not liable for UK Inheritance tax.

Want to make sure that UK tax rules work for you and take account of your family’s specific circumstances, book a consultation with me.

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Saule Voluckyte, M.A.E.S, LL.B, FAIA

I have been working exclusively with UHNWI in Mayfair, London since January 2008. I built specialist knowledge and expertise required to serve ultra high net worth individuals investing, operating and relocating to the UK or Switzerland.

Within the industry, I am the single adviser who is able to traverse the different areas of expertise and bring a comprehensive approach across: global structuring, UK immigration, international taxation and FOREX to develop their global wealth strategy, while they build, grow and expand their wealth worldwide.

Previous experience as one of the senior advisors for the government, made me a go-to person when delicate and uncomfortable scenarios involving heads of state need to be handled with care and preserve privacy.