Many British expatriates remain UK-domiciled without realising it, leaving their estate exposed to UK inheritance tax rates of 40%.
Many British expatriates remain UK-domiciled without realising it, leaving their estate exposed to UK inheritance tax rates of 40%. Get to know how UK domicile works to see where you stand.
For British expatriates, understanding domicile is an important element of estate planning. It is domicile, not residence, that determines your liability for UK inheritance tax. With rates at 40%, UK inheritance tax is one of the most expensive taxes facing British families – and living abroad does not automatically protect you.
Domicile is a complex and incredibly adhesive UK common law concept. The basic rule is that a person is domiciled in the country in which they have their permanent home – the country regarded as your ‘homeland’. However, you can remain UK-domiciled even after living abroad for many years.
There are three types of domicile under English law:
- Domicile of origin – where a child takes their father’s (or single/unmarried mother’s) domicile (not necessarily their country of birth).
- Domicile of dependence – applies to women married before 1974 (whose domicile will mirror their husband’s) as well as minors and other legal dependents.
- Domicile of choice – acquired by moving permanently to another country.
While changing your domicile is possible, this needs to be a carefully considered and planned process as there are no set rules – much depends on your particular circumstances and intentions. If challenged by HM Revenue and Customs (HMRC), the onus is on you – or, rather, your family inheriting your assets – to prove you were non-UK domicile at the date of death.
To acquire a domicile of choice you must be physically present and tax resident in your new country, intend to live there permanently, and not foresee any reason to return to the UK. You need to sever as many ties as possible with the UK, as HMRC will look for any indication that you see Britain as your homeland and may return one day. Even stating in your will that you wish to be buried in the UK could work against you. Electing for UK succession law to apply over local ‘forced heirship’ rules could also be a tipping point in combination with other ties to the UK.
Even if you adopt a domicile of choice outside the UK, it can take up to four years to shed a UK domicile for inheritance tax purposes. HMRC may treat you as UK-domiciled if you:
- were UK resident for 15 (previously 17) of the last 20 tax years;
- return to Britain for more than a year (if the UK is your domicile of origin and place of birth);
- move to a third country – until you can demonstrate you have established a new domicile of choice.
A real divorce case involving an Irish national demonstrates the ‘stickiness’ of UK domicile. HMRC determined that she had a UK domicile of choice, despite spending less than three years living in the UK – the longest run being 18 months – almost 20 years prior. But while an EU diplomat, she had cited the UK as her country of origin, given a ‘permanent’ London address and registered on the British electoral roll. This was considered enough to make the UK her permanent home, while none of her overseas stays were sufficient to acquire a new domicile of choice.
The effect of domicile on taxes
Anyone who is deemed UK-domiciled is liable to 40% inheritance tax on their worldwide assets (since April 2017, this includes all UK residential property). There is an individual tax-free allowance of £325,000, transferable to your spouse or civil partner, plus a £125,000 ‘family home allowance’ (increasing to £150,000 this April and £175,000 in April 2020).
Many other countries have a version of inheritance tax, so as well as UK taxation, you could be liable to the local succession tax in your country of residence. However, in most cases, such as in Portugal and Spain, the UK would give credit for the tax paid overseas. France, on the other hand, has a special double tax treaty for succession taxes so tax is not due twice on assets outside the UK.
Find out more about inheritance taxes in Europe
Non-UK domiciles are only liable to UK inheritance tax on assets situated in the UK.
See five things you may not realise about UK inhertitance tax
The best approach
Domicile is a complex area of law, particularly for inheritance tax purposes. If you are looking to claim change of domicile, or if there is a significant amount of UK inheritance tax at stake, you should take expert advice specific to your circumstances.
Whether or not you have UK domicile status, there are tax planning arrangements available to reduce your liabilities to inheritance and other taxes.
As experts in this area, Blevins Franks can help you establish your domicile status, how inheritance tax interacts with the local inheritance tax in your country of residence, and what steps you can take to minimise unnecessary taxes for your heirs.
See more about our estate planning services
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; individuals should seek personalised advice.