It’s a common misconception that expats setting up home outside the UK don’t have to pay Inheritance Tax. The truth is that you remain liable to the UK Inheritance Tax on your worldwide assets if you are domiciled or deemed domiciled in the UK.
Are Expats UK Domiciled?
Domicile is different to where you are resident. You are generally domiciled in the country you regard as ‘home’. You can live outside the UK for many years and remain domiciled in the UK.
Actor Richard Burton was famously deemed to be UK domiciled, having lived in Switzerland for 26 years for requesting a Welsh flag be draped over his coffin. HMRC saw the photos in the press, the case went to court and his estate had to pay £2.4 million.
- The concept of domicile is completely distinct form residence
- In a nutshell, residence is where you live and domicile is where you are from, and where you consider to be ‘home’
- An individual must have a domicile but can only have once country of domicile at a time.
- By contrast, its is perfectly possible to be considered a resident of more than one country in a tax year or indeed a resident of no country.
Types of Domicile
Domicile of Origin
Is acquired at birth and is that of the child’s father (where the parents were married), and of the child’s mother )where they were not).
Domicile of dependency
Where children under 16 acquire the domicile of their father or mother (under domicile of the origin rules), and of their father’s domicile of origin is replaced with a domicile of choice before the child is 16, then the child’s domicile also changes.
Domicile of choice
An individual can choose to be domiciled in an alternative country. This relies partly on establishing residence in the chosen nation. However, it is more important to demonstrate over time the intention to remain there indefinitely, by severing ties to the origin country.
How Do I Change Domicile
Firstly, you need to be physically present and tax resident in your new country and intend to live there permanently.
Then you need to sever ties with the UK, personal, financial and legal, but it can take up to four years to not be deemed to be a UK domicile for inheritance tax purposes. Returning to the UK or moving to a third country can lead to you still being deemed to be UK domiciled.
HMRC are unlikely to look at your domicile until it becomes relevant for tax purposes, at which point you may need to provide proof. They are unlikely to guide you until then so it is worth knowing the sort of information they might use:
- Personal and family details such as your place of birth, nationality at birth, parents’ names, marital status, and places of birth. Also details of marriages or relationships, children and your partner’s nationality.
- Residences from birth, properties owned and property that has been available for you to use.
- Where you have voted and participated in civic life, professional memberships, any clubs, or societies and religious, cultural, and social connections.
- That you can speak, read and write the local language.
- Your will and the jurisdiction this is written under and the location of important personal papers and items of financial or sentimental value.
- Location and service of any professional advisers, such as lawyers and accountants.
- Evidence of all of the above, such as birth certificates, financial policies and maybe even personal correspondence like photos or emails demonstrating your background and life in your chosen country.
Inheritance Tax (IHT) for Non-UK Residents
For individuals who are domiciled or deemed to be domiciled in the UK when they die, their estate will be:
- Liable to 40% inheritance tax on their worldwide assets (subject to a tax-free allowance of £325,000 plus a £175,000 ‘family home allowance’ for those who qualify).
- For estates of individuals not domiciled or deemed domiciled in the UK:
Only the UK based assets that will be subject to IHT (subject to the tax free allowance of £325,000).
IHT Planning for Expats
Domicile is a fundamental element of Inheritance Tax planning but there are many other strategies including gifts, pensions, insurance and trusts.
Inheritance Tax planning is complex and requires professional advice, especially when confirming domicile, or properly documenting a domicile of choice.
A qualified expert can establish your domicile status and help plan a UK Inheritance Tax strategy, how this would work alongside local taxes, and what action can be taken to manage and minimise this.
Global Advice Group Ltd can analyse your situation, provide UK regulated advice and prepare comprehensive personal recommendations to help secure your family’s finances.