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Home arrow Finance arrow Do you know where you are domiciled? Are you sure?
Do you know where you are domiciled? Are you sure?
Monday, 13 November 2017

For Britishexpatriates, understanding domicile is an important element of estate planning.It is domicile, not residence, that determines your liability for UKinheritance tax. With rates at 40%, UK inheritance tax is one of the most expensivetaxes facing British families - and living in Spain does not automaticallyprotect you.

Determining domicile

Domicile is acomplex and incredibly adhesive UK common law concept. The basic rule is that aperson is domiciled in the country in which they have their permanent home -the country regarded as your ‘homeland'. However, you can remain UK-domiciledeven after living abroad for many years.

There arethree types of domicile under English law:

·        Domicileof origin - where a child takes their father's (or single/unmarried mother's)domicile (not necessarily their country of birth). 

·        Domicileof dependence - applies to women married before 1974 (whose domicile willmirror their husband's) as well as minors and other legal dependents.

·        Domicileof choice - acquired by moving permanently to another country.

While changingyour domicile is possible, this needs to be a carefully considered and plannedprocess as there are no set rules - much depends on your particular circumstancesand intentions. If challenged by HM Revenue and Customs (HMRC), the onus is onyou - or, rather, your family inheriting your assets - to prove you were non-UKdomicile at the date of death.

Changing domicile

To acquire adomicile of choice you must be physically present and tax resident in your newcountry, intend to live there permanently, and not foresee any reason to returnto the UK. You need to sever as many ties as possible with the UK, as HMRC willlook for any indication that you see Britain as your homeland and may returnone day. Even stating in your will that you wish to be buried in the UK could workagainst you. Electing for UK succession law to apply over local ‘forcedheirship' rules could also be a tipping point in combination with other ties tothe UK.

Even if youadopt a domicile of choice outside the UK, it can take up to four years to sheda UK domicile for inheritance tax purposes. HMRC may treat you as UK-domiciledif you:

·        wereUK resident for 15* (previously 17) of the last 20 tax years (*due to changeimminently and be back-dated to April 2017)

·        returnto Britain for more than a year (if the UK is your domicile of origin and placeof birth)

·        moveto a third country - until you can demonstrate you have established a newdomicile of choice.

A recent divorcecase involving an Irish national demonstrates the ‘stickiness' of UK domicile. HMRCdetermined that she had a UK domicile of choice, despite spending less than threeyears living in the UK - the longest run being 18 months - almost 20 years ago.But while an EU diplomat, she had cited the UK as her country of origin, givena ‘permanent' London address and registered on the British electoral roll. Thiswas considered enough to make the UK her permanent home, while none of heroverseas stays were sufficient to acquire a new domicile of choice.

The effect of domicile on taxes

Anyone who isdeemed UK-domiciled is liable to 40% inheritance tax on their worldwide assetsabove the individual tax-free allowance of £325,000 - which is transferable toyour spouse or civil partner. By 2020, the phasing in of a new ‘family homeallowance' will add an extra £175,000 allowance per person, meaning a totalpotential threshold per couple of £1 million.

Many othercountries have a version of inheritance tax, so as well as UKinheritance tax, you could be liable to Spanish succession tax.

However, inmost cases the UK would give credit for the tax paid overseas toavoid double taxation onthe same asset.  

Non-UKdomiciles are only liable to tax on assets situated in the UK.

The best approach

Domicile is acomplex area of law, particularly for inheritance tax purposes. If you arelooking to claim change of domicile, or if there is a significant amount of UKinheritance tax at stake, you should take expert advice specific to yourcircumstances. Whether or not you have UK domicile status, there are taxplanning arrangements available to reduce your liabilities to inheritance andother taxes. An expert in this area will help you establish your domicilestatus, how inheritance tax interacts with Spanish succession tax and whatsteps you can take to minimise unnecessary taxes for your heirs.

David Bowern,Partner, Blevins Franks
Email:
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Tel: 952 809 212

 

Tax rates, scope and reliefs may change. Any statementsconcerning taxation are based upon our understanding of current taxation lawsand practices, which are subject to change. Tax information has beensummarised; individuals are advised to seek personalised advice.

For morefinancial articles written for expatriates visit the BlevinsFranks website

 

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