Domicile is an important issue for British expatriates. You remain liable to UK inheritance tax on your worldwide assets for as long as you are domiciled in the UK. While it can be possible to change your domicile, it depends on your circumstances and intentions and should be a carefully considered and planned process.
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’, ‘the place where you intend to die’. You can live in Portugal for years and remain domiciled in the UK.
Domicile and inheritance tax
Whether or not your estate will be assessed for UK inheritance tax (IHT) depends on your domicile status (not tax residence).
Anyone deemed UK-domiciled is liable to 40% inheritance tax on their worldwide assets. There is an individual tax-free allowance of £325,000, transferable to your spouse/civil partner, plus a £175,000 ‘family home allowance’. Transfers to spouses/civil partners are exempt from IHT, provided you are both UK domiciled. Otherwise, the exemption is limited to the nil rate band.
If you die as a non-UK domicile, you will only be liable to UK inheritance tax on UK situated assets (on the value above the allowances).
Types of domicile
Domicile of origin – UK common law ascribes a domicile of origin to every individual at birth. Generally the father’s domicile, or the mother’s if single (so not necessarily your country of birth).
Domicile of dependence – this applies to women married before 1974, minors and other legal dependents.
Domicile of choice – As the HM Revenue & Customs RDRM22010 explains, “any individual who has legal capacity can acquire a domicile of choice”.
Acquiring a domicile of choice
To acquire a domicile of choice, you must be physically present and tax resident in your new country and intend to live there permanently or indefinitely.
Since HMRC could examine your intentions, to look for indications you see Britain as your homeland and may return in future, you need to sever as many ties as possible. 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 take all the steps to 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 of the last 20 tax years
- return to Britain for more than a year (if 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.
Proving domicile
Domicile determination is a highly specialist area; you need professional advice to ensure you get it right. If you believe you have shaken off your UK domicile but HMRC determine otherwise, your heirs will face an unexpected tax bill.
Here are examples of types of information HMRC could request during a domicile enquiry:
- Date, place and nationality at birth, parents’ names and marital status, details of siblings.
- Marriages/civil partnerships details, divorce, long-term cohabitation, children’s details (names, dates of birth, nationalities, education, current locations, etc).
- List of all residences from birth, details of property transfers, summary of residences that have been available for your use.
- Information regarding exercise of political rights in any territory; memberships of professional bodies, clubs, associations, etc; details of religious, cultural and social connections.
- Ability to speak, read and write the relevant languages.
- Details of wills and the law governed by and any deeds and declarations, location of personal papers and items of financial or sentimental value.
- Summary of professional and personal advisers.
You will need documentary evidence, e.g., birth certificates, insurance policies, wills, perhaps personal correspondence, photos, electronic records, etc, relating to your background, lifestyle and intentions.
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, so leave all the paperwork in order for them.
Domicile and estate planning
Professional, specialist advice specific to your circumstances and intentions is essential here,
if you want to avoid leaving your heirs any unexpected tax bills and headaches.
Whether or not you have UK domicile status, there are tax planning arrangements available to reduce your liabilities to inheritance and other taxes. An expert in this area will help you establish your domicile status, how inheritance tax interacts with Portuguese stamp duty, and what steps you can take to minimise unnecessary taxes for your heirs.
The 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; an individual should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com
