Your client, Dan, requires advice on the inheritance tax implications arising as a result of the recent death of his father, Noah, Dan’s own UK residence status, and the potential chargeable gain arising on his proposed disposal of his UK house.
Noah:
– Was resident in the UK from 1 April 1998 until his death on 31 May 2017, following a short illness.
– Had a domicile of origin in the country of Skarta and did not acquire a domicile of choice in the UK.
– Has one child, Dan.
Noah – information for inheritance tax:
– Noah had not made any lifetime gifts.
– Noah left all the assets in his estate upon his death to Dan.
Noah – valuation of assets owned at death on 31 May 2017:
£
House located in the country of Skarta 242,000
Chattels and cash in the UK 335,000
Inheritance tax and liabilities in the country of Skarta:
– Under the tax system in Skarta, the inheritance tax payable will be £56,080.
– Legal and administration fees of £12,400 will be payable in Skarta in respect of Noah’s house.
– There is no double tax treaty between the UK and Skarta.
Dan:
– Is domiciled in the country of Skarta.
– Is unmarried, and has no children.
– First became resident in the UK on 1 July 2012.
– Left the UK on 1 January 2016 to go travelling.
– Returned to the UK for the first time on 15 May 2017, when his father was taken ill.
– Intends to work part time in the UK throughout the month of July 2017 only.
– Will remain in the UK until 5 August 2017, when he intends to move permanently to Skarta.
Dan – disposal of his UK house:
– Dan purchased a house in the UK on 1 October 2012 for £286,000, where he lived until 1 January 2016.
– He has not lived in the house since this date.
– He allowed his father, Noah, to live in the house, rent-free, until his father’s death.
– He has agreed to sell the UK house on 1 August 2017 for £318,000.
– The house was valued at £297,000 on 5 April 2015.
Required:
(i) State, giving reasons, whether or not the house in Skarta will be included in Noah’s chargeable estate on death for the purposes of UK inheritance tax.
(ii) Assuming that the house in Skarta is subject to inheritance tax in the UK, calculate the value of Dan’s inheritance from Noah after all taxes and liabilities have been paid.
(i) Inheritance tax treatment of the house located in Skarta
An individual who is not domiciled or deemed domiciled in the UK is liable to UK inheritance tax only in respect of assets located in the UK
An individual is deemed domiciled in the UK if they have been resident in the UK for 17 out of the 20 tax years ending with the tax year in which the transfer is made, and accordingly are liable to UK inheritance tax on their worldwide assets.
Noah became resident in the UK on 1 April 1998, so by the time of his death on 31 May 2017, Noah had been resident in the UK for 19 tax years, so would be deemed domiciled in the UK for inheritance tax purposes. Therefore the house located in Skarta will be included in his chargeable death estate.
(ii) Value of Dan’s inheritance
Noah – death estate
(i) On the assumption that Dan does not satisfy either of the automatic tests for determining his UK residence status, explain why Dan will NOT be resident in the UK for tax purposes in the tax year 2017/18.
(ii) Calculate the chargeable gain arising on the disposal of Dan’s UK house on 1 August 2017 under the residential property rules applicable to non-UK residents. Dan will not elect to be taxed on the whole of the gain but will elect for the gain to be time-apportioned if it is beneficial to do so.
(i) Reasons why Dan will be classed as non-UK resident in the tax year 2017/18.
As Dan does not satisfy the criteria under either of the automatic tests for determining his UK residence status, the ‘sufficient ties’ tests must be considered. These take into account the number of days spent in the UK and the number of ‘ties’ Dan has to the UK.
As Dan has previously been resident in the UK in at least one of the previous three tax years, and will spend between 46 and 90 days in the UK during 2017/18 (15 May to 5 August 2017), he would be considered to be UK resident in this tax year if he has at least three UK ties.
Dan will satisfy only one tie:
– He spent more than 90 days in the UK in the tax year 2015/16, as he did not leave the UK until 1 January 2016.
Dan will not satisfy the remaining four ties:
– He does not have any close family residing in the UK.
– He will not have an accommodation tie in 2017/18 because he will not have spent at least one night in his UK property in 2017/18.
– He will not be present in the UK for the same number or more days in 2017/18 than in any other country.
– He will not have substantive work in the UK in 2017/18.
Accordingly, Dan will be classed as non-UK resident in 2017/18.
Tutorial notes:
1. A parent (Noah) does not fall within the definition of close family for this purpose.
2. Although Dan will have owned his house in the UK up to the date of its sale on 1 August 2017 (i.e. for more than 91 days in 2017/18), he will not have spent at least one night there during 2017/18.
3. As Dan is planning to move permanently to Skarta on 5 August 2017, he will not be present in the UK for more days in 2017/18 than in any other country.
4. Dan will be working for 31 days in July 2017, which is insufficient to be regarded as ‘substantive’ (40 days or more).
(ii) Dan – capital gains tax liability on disposal of his UK house
Default method – gain arising after 5 April 2015
Dan will have owned the house from 1 October 2012 to 1 August 2017, i.e. 58 months.
The period from 6 April 2015 to 1 August 2017 is 28 months.
The post-6 April 2015 gain is £15,448 (£32,000 x 28/58).
Dan should therefore elect to use the straight line time apportionment method as this produces a lower gain.
