Regardless of your residency in the Cayman Islands, it is your domicile status that determines whether you pay UK Inheritance Tax on your worldwide assets. There is a common misconception that people who are not UK residents are automatically not also UK domiciled, and thus outside the scope of UK IHT. This is not true! Read on for more information on this very relevant topic for UK citizens who live in the Cayman Islands.
Domicile
No matter if you became a Cayman resident and a non-resident of the UK, it is your domicile status that determines whether you have to pay UK Inheritance Tax (IHT) on your worldwide assets. There is a common misconception that people who are not UK residents are automatically not also UK domiciled, and thus outside the scope of UK IHT. This is not true! In order to avoid UK IHT on your worldwide wealth, you will need to change your domicile to the Cayman Islands. Non-UK domiciled individuals will generally be liable for IHT only on UK assets.
Additionally, many individuals are unaware of the concept of 'deemed' domicile. It is a statutory concept that automatically places non-UK residents in the IHT net for at least three full tax years after leaving the UK.
Sadly, domicile only becomes an issue after you die and therefore many people ignore this at their cost.
Domicile is not defined in legislation (Acts of Parliament), unlike tax residence. Domicile is a common law concept - in other words, the Courts have developed the concept of domicile over the years and the principles of domicile are contained in the published judgements of courts and tribunals. This is clearly not that easy to follow and advice should be sought.
You can only have one domicile at a time, and you cannot be without one. Your domicile is usually where your permanent home is and your existing domicile will continue until you acquire a new domicile. Domicile is distinct from your nationality and residence and a wide range of evidence has to be examined in evaluating your intentions to establish whether you have changed your domicile. There are three types of domicile which we have explored below.
Domicile of Origin
You will have acquired a domicile of origin at birth and you will have acquired your father’s domicile at the time of your birth unless your parents were not married at the time of your birth, in which case you would have acquired your mother’s domicile. A domicile of origin will continue throughout life until a domicile of dependence or choice is acquired.
Domicile of Dependence
The domicile of a minor child normally follows that of the person on whom they are legally dependent (for example their father). An individual is capable of having a domicile of choice when they turn 16.
From the age of 16 an individual can change their domicile by choice but if no such intention is demonstrated their domicile of dependence persists.
Domicile of Choice
A domicile of choice is acquired by taking up residence in a new country with the intention of making it one's permanent home. The domicile of origin does not disappear once you acquire a domicile of choice, and will revive if your domicile of choice or dependence is abandoned. In the event that you obtain a domicile of choice in Cayman and then leave Cayman permanently, your domicile of origin would revive (unless an alternative domicile of choice is acquired simultaneously).
This will be relevant for many readers. If you have become a Cayman resident and wish to start the process of removing yourself from the scope of IHT then you must acquire a domicile of choice ie a Cayman domicile.
The acquisition of a domicile of choice is notoriously difficult. As a general rule, you need the following to obtain a domicile of choice in Cayman:
• Currently reside in Cayman; and
• have the intention to reside permanently or indefinitely in Cayman.
In order to acquire a domicile of choice in Cayman, in practice, you must actively sever ties with your country of origin (for example, England and Wales, Scotland or Northern Ireland). You must also begin to actively acquire a new domicile of choice. Certain actions are indicative of the adoption of a new domicile of choice. For example, making a will under Cayman law, cancelling UK club memberships and buying a family home in the Cayman Islands.
His Majesty's Revenue and Customs (HMRC) can request that you (or your heirs or executors) present strong evidence to show your intention to live in Cayman, either permanently or indefinitely. Even though living in Cayman for a long period of time is an important factor, it does not in itself establish a domicile of choice in the Cayman Islands.
You should retain all evidence to support your change of domicile. Ideally a domicile file should be maintained. It is amazing how quickly memories fade. At some point you or your executors may need to recall facts and provide evidence to support your tax position.
Overall, it is important to ask yourself, “where is my home”, and if the answer is Cayman and nowhere else, you may be well on your way to becoming non-UK domiciled. If HMRC examines your domicile status, they will scrutinize every aspect of your life (and possibly your parent’s life as well as your husband's life if you are a woman who married before 1974). The times they are most likely to examine your domicile status are in the event of your death or if you establish a trust.
You will have a hard time proving that you intend to live in Cayman indefinitely if you don't have Permanent Residence. However, this is a subtle point and even if you are restricted in your ability to stay in Cayman, if your intention to remain in Cayman is fixed, you may well achieve non-UK domiciled status. If you have lived in Cayman for many years and then decide to move to another country, your domicile of origin may revert immediately. This is unless you immediately acquire another domicile of choice elsewhere. Finally, if you live in Cayman but have a couple of homes elsewhere (eg Florida and France) and spend time in all of those places, HMRC may try and argue that you cannot decide where you intend to live permanently and that your domicile of origin remains in place.
Deemed Domicile
The foregoing outlines the position as a matter of common law. In addition, there are the statutory ‘deemed’ domicile rules. If these apply, someone who is domiciled outside the UK (under the common law) will also be deemed to have a UK domicile.
There are three main types of deemed domicile that are relevant.
An individual will be deemed to be UK domiciled for IHT purposes if they are domiciled outside the UK under common law and either:
1. In the last three years (i.e. in the last 36 months), they have been domiciled in the UK under common law. This applies even if the individual has left the UK or has been living outside the UK for a long period of time, as long as they have not been domiciled in another country for more than 3 years.
2. They were born in the UK with a UK domicile of origin and have returned to the UK and become UK resident. These people are called "formerly domiciled residents" or FDRs. Usually there is a year of grace, so you won't become deemed domiciled until the start of the tax year after the tax year you return to the UK.
3. They have been resident in the UK for at least 15 of the preceding 20 tax years including, at least one of the four tax years ending in the current tax year.(the ‘15/20 rule’).
Example 1
Joe, who originated in Scotland, left Scotland permanently in 2019. His intention was to work for five years in Cayman, then settle permanently in The Bahamas. However in July 2022, Joe decided to live permanently in Cayman. He thought five years would be enough, but he ended up falling in love with island life and never wanted to leave!
Joe acquired a Cayman domicile of choice in July 2022 (the first time he was both resident in Cayman and intended to live permanently or indefinitely in Cayman. In the event of Joe's death or establishing a trust prior to July 2025, he will be deemed domiciled in the UK because he will have had a Scottish domicile within the last three years. He will be subject to UK inherence tax on his worldwide estate (or the entire trust fund if he establishes a trust prior to July 2025).
Example 2
Richard, who originated in England, moved to Cayman in 1990, with the intention of living in Cayman permanently. He settled in quickly, finding a home, job and friends in Cayman. However, in the fall of 2022 Richard fell ill. Richard decided to move back to the UK at Christmas 2022 to be closer to his extended family while he received medical treatment. Richard was finally back in the land of his birth, but it was a trip he'd rather not have taken. Richard was so excited to see his extended family, but as soon as he touched down he realized he had forgotten to bring an umbrella and he muttered to himself "Oh, great, just what I need - English weather!" Richard always intended to return to Cayman, once his medical treatment was complete, and had booked a return ticket. But it wasn't to be. Richard's medical treatment was unsuccessful and sadly he died in May 2023. Richard's last words were: "I should have stayed in the Cayman Islands - that's where my home is!"
Richard was not domiciled in England (under the common law) at his death, as he intended to return to the Cayman. However he was a "formerly domiciled resident" so was deemed domiciled in the UK. Richard's entire estate, including his Cayman property, was liable for UK IHT at 40%. His Cayman trust also suffered UK IHT at 40%, because he was not absolutely excluded from benefiting from them.
Richard would have been in the “year of grace” up to 5 April 2023, and had he taken tax advice, could have taken steps to mitigate the exposure to UK IHT.
Example 3
Mei, who a US citizen, originated in New York State, moved to England in 2004. Mei never intended to live permanently in England, so she never acquired an English domicile of choice. Mei moved to Cayman in September 2021 (which is in the tax year ended 5 April 2022). Mei had realized that the British tax code was too complicated, so she decided to move to Cayman to get some much needed "tax relief"! (UK tax years run from 6 April to the following 5 April.)
At any point in the tax years ended or ending 5 April 2022, 5 April 2023, 5 April 2024 and 5 April 2025, Mei will have been UK resident for more than 15 tax years in the previous 20 tax years, including at least one year in the four tax years ending in the present tax year. Hence Mei will be deemed domiciled in the UK up to 5 April 2025 (and will suffer UK IHT on her worldwide estate if she dies, or the entire trust fund if she establishes a trust, prior to 5 April 2025).
On 6 April 2025, she will have been non UK resident for the four most recent tax years (the tax years ended or ending 5 April 2023, 5 April 2024, 5 April 2025 and 5 April 2026). Therefore, if Mei dies or establishes a trust from 6 April 2025, she will only suffer UK IHT on her property situated in the UK or any UK assets she transfers to a trust.
Summary
When you move to Cayman after being a UK resident and domiciled, you retain UK IHT liability on your worldwide estate for at least three complete tax years. If you wish to create a trust, this is especially important. If you create a trust within this period then you will still be deemed domiciled in the UK. IHT will be charged on any assets transferred to the trust at a rate of 20% of the value of the assets. This rule causes many people to inadvertently trigger IHT charges when they could easily have been avoided by getting the timing right.
You cease to be liable to IHT on your worldwide estate from the later of the:
• three years after the day you acquire a domicile of choice in Cayman (this may not coincide with the day you become resident in Cayman); and
• three years after the 6 April following your cessation of UK residence.
Advice on UK Tax & Domicile
Hotchkiss Associates Limited
Cooil Shellagh House, Kirk Michael, Isle of Man
Tel: +44 (1624) 872 140
Email: info@Hotchkiss.im or www.hotchkiss.im
A professional team of tax advisors. They provide clear and concise UK and international tax advice for clients. They offer UK tax services in the following areas: bespoke private client tax advice, succession and estate planning for high net worth families and individuals, including tax residence and domicile reviews; tax-efficient structuring using trusts and offshore companies; funds taxation and business structuring; dealing with tax investigations and using disclosure facilities as well as tax returns. Paul Hotchkiss is the author of the UK tax and domicile advice in this section.