My daughter wants to travel home from Australia but only has 5 months left on her UK Passport.
Will she still be able to travel?
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Your question is explicitly addressed by the rules. Paragraph 12 of the UK Immigration Rules states...
A person claiming to be a British citizen must prove that he has the right of abode in the United Kingdom by producing either:
(i) a United Kingdom passport describing him as a British citizen or as a citizen of the United Kingdom and Colonies having the right of abode in the United Kingdom; or
(ii) a certificate of entitlement duly issued by or on behalf of the Government of the United Kingdom certifying that he has the right of abode.
There is no requirement for the passport to be current. Otherwise the rule would say "valid" or "current".
Having said that, the key phrase in the rule is "describing him as...". So if a passport by its age no longer describes the person, or if the passport is damaged or illegible, then it's reasonable to expect a problem. In your case, these are non-issues so your daughter is good to go.
Some countries apply restrictions on tourists (e.g. still having 3 to 6 months validity left on the passport) but I would expect that just about any country in the world would accept a valid passport from their own citizens, even if it expires the day after. Many countries, including the UK, even officially accept expired passports in this situation.
You don't need a passport to be British, you just are. (It's like having AIDS, you're stuck with it.) Though a passport is a handy way of proving it, it's just a bit of paper. I quote an embassy official I once chatted to about my children, who don't have passports, but are nevertheless British.
edit: yes, right. You just have to prove you have a right to enter the country and the passport is the usual way to do this. And since British citizenship doesn't run out, an expired passport must be acceptable.