How UK Inheritance Tax Affects Expats

By Jason Porter

For British expatriates, understanding domicile is an important element of estate planning.
It is domicile that determines your liability for UK inheritance tax, not residence. UK inheritance tax is one of the most financially damaging taxes facing wealthier British families and living outside the UK does not automatically protect you.

Anyone who is UK domiciled or deemed UK domiciled is liable to inheritance tax on their worldwide assets. The current threshold for inheritance tax is £325,000 per individual, with tax then charged at 40%. Transfers between spouses are exempt (unless the beneficiary spouse is not a UK domicile, and they do not elect to be treated as UK domicile).

Domicile is a complex UK common law concept. The basic rule is that a person is domiciled in the country in which they have their home permanently or indefinitely – the country you regard as your ‘homeland’. You can live abroad for many years and remain domiciled in the UK.

While changing your domicile is not impossible, it depends on your circumstances and intentions and needs to be a carefully considered and planned process. The onus is on you (or your family when inheriting your assets) to prove you were non-UK domicile at the date of death, in the event of a challenge from HM Revenue & Customs (HMRC).

Many other countries have a version of inheritance tax so tax may be payable twice, although in most cases the UK would give credit for the tax paid overseas. This would be the case for British expatriates living in Spain or in Portugal for example. France has a special double tax treaty for inheritance tax so tax is not paid twice on assets outside the UK.

If you are a non-UK domicile, you are only liable to tax on assets situated in the UK.

There are three types of domicile under English law:

1. Domicile of origin – a child takes their father’s domicile of origin (or of a single mother) at birth, not necessarily the country where you are born.
2. Domicile of dependence – applies to women married before 1974, children and mentally incapable persons.
3. Domicile of choice – can be acquired by moving permanently to another country.

To acquire a domicile of choice, you must be physically present and a tax resident in your new country, have formed the intention of living there permanently, and not foresee any reason to return to the UK. You need to sever as many ties as possible with the UK; even stipulating in your will that you wish to be buried there will count against your case. HMRC will look for any indication that you regard Britain as your homeland and may return one day.

It takes at least three years to shed UK domicile for inheritance tax purposes. You will be deemed domiciled in the UK for inheritance tax if you were UK domiciled at any time in the previous three years, or were UK resident for any part of 17 of the last 20 tax years.
Although the link to domicile of origin can be removed, it will be instantly reinstated if you return to the UK, and probably even if you move to a third country, until you can demonstrate you have established a new domicile of choice.

Inheritance tax is often described as a ‘voluntary tax’ since tax planning devices are available to mitigate or avoid it. This applies whether or not you have a UK domicile, but for expatriates domicile is a key factor in inheritance tax planning. There are a number of ways in which your domicile status can be satisfactorily tested, but professional guidance is required. If you get it wrong, your heirs could receive an unexpected tax bill.

An expert in this area will 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 avoid these taxes for your heirs.

Remember you may not be dealing with this yourself. It may be your heirs and/or executor who have to prove to HMRC that your estate should not be liable to UK inheritance tax. You will therefore want to leave all your paperwork in order for them.

• Jason Porter is a director of expat financial planning firm, Blevins Franks