One of the most financially damaging taxes facing wealthier Britons is UK inheritance tax (IHT). Living overseas and being a tax resident here does not automatically protect you from IHT as liabi
One of the most financially damaging taxes facing wealthier Britons is UK inheritance tax (IHT). Living overseas and being a tax resident here does not automatically protect you from IHT as liability to this tax does not rest on nationality or residence but on domicile.
Domicile is a concept of UK common law and can be complex and difficult to prove. HM Revenue & Customs (HMRC) will not make a decision on your domicile status until there is a tax issue at stake and even then the onus is on you (or usually on your family or whoever is inheriting your assets) to prove whether or not you are UK domicile or non-domicile.
The major tax effect of being a UK domicile is that you will be liable to UK IHT on your worldwide assets. Any assets situated in another country may also be liable to that country?s inheritance tax, although in most cases the UK would give credit for the tax paid in another country on the assets situated there. This would be the case for British expatriates living in Spain or Portugal for example, but not France which has a special double tax treaty for inheritance tax. If you are a non UK domicile you are only liable to UK IHT on assets situated in the UK.
Under UK law you can only have one domicile at any point in time, even if you are resident in more than one country or a fiscal nomad. Your place of domicile does not have to be the country within which you have your closest personal association as you can live in a country for many years and still remain domiciled elsewhere. You can never be without a domicile.
The basic rule is that you are domiciled in the country where you have a permanent or indefinite home. This is often described as the country you regard as your homeland and the place where you intend to die or be buried.
There are three types of domicile under English law:
Domicile of origin – a legitimate child takes his father?s domicile of origin at the time of birth. This isn?t necessarily the same country in which the birth occurs. A child born outside marriage, or after the father's death, takes the mother's domicile at the time of birth. A foundling takes on the domicile of the country in which found. An adopted child acquires a new domicile of origin from the adoptive parent.
Domicile of dependence – applies to children and mentally disordered persons.
Domicile of choice – can be acquired by moving to another country which can then replace either domicile of origin or dependence. Although the link to domicile of origin can be removed, it is not destroyed and can be instantly reinstated. For instance, if you lose your domicile of choice by leaving your new country of residence and moving to a third country, you are likely to re-acquire your domicile of origin, unless you can demonstrate that you have moved to a new domicile of choice. To acquire a domicile of choice you must be physically present and a tax resident in your new country and have moved with the intention of living there permanently.
In order to become a UK non-domicile you must establish a permanent home in your new country and sever as many ties as possible with the UK. This includes disposing of your UK residence and other property; resigning from membership of social clubs and other organisations; cutting business interests; scaling down UK bank accounts, credit cards and investments; making a Will in you new country and obtaining a driving licence in your new country of residence.
If HMRC decides to consider your domicile status it will seek the answers to a large number of questions and possibly request documentary proof as to the replies.
It takes at least three years to shed UK domicile for IHT purposes, i.e. you will be treated as deemed domicile in the UK for IHT if you were UK domiciled at any time within the previous three calendar years (36 months); or were resident in the UK for any part of at least 17 of the last 20 tax years (the current year being the 20th).
UK domicile is not set in stone or an easy status to determine. It is not simply a matter of cutting back your past connections with the UK – you have to think of your future activity also. For example, you need to be careful about the number of trips you make to the UK after relocating to another country. Even stipulating in your Will that you wish to be buried in the UK will count against your case. HMRC will look for any indication that you regard the UK as your homeland and may possibly return for good one day.
The 2009/10 tax threshold for UK IHT is ?325,000 per individual or ?650,000 for spouses and civil partners. Any amount bequeathed over these figures is taxed at 40%. Transfers between spouses are exempt except where the donor or deceased spouse is UK domiciled but the recipient spouse is non-UK domiciled then there is no blanket exemption and only a one-off allowance of ?55,000 in addition to the nil-rate band.
IHT is often described as a voluntary tax because there are a number of legitimate ways where the tax liability can be reduced or completely avoided. If you presume you escape this tax because you do not think you are a UK domicile but then HMRC deems that you are your heirs could face a large and totally unexpected tax bill, so it is important to get professional guidance. Speak to an international tax and wealth manager like Blevins Franks who have years of experience determining domicile and advising expatriates on the tax mitigation structures available to them.
By Bill Blevins, Managing Director, Blevins Franks
2nd October 2009
