There are now an estimated 40,000 British nationals living in Portugal, many enjoying beneficial tax status under the Non-Habitual Resident (NHR) regime. But NHR status lasts for only 10 years, and it does not resolve the issue of UK Inheritance Tax (IHT).
IHT is based on a person’s domicile, rather than residence. ‘Domicile’ is a legal concept that determines where your permanent home is located, regardless of your current country of habitual or fiscal residency. This means that many British expatriates, even those that have lived in another country for decades, still find themselves (often unknowingly) UK-domiciled.
If they are found to be UK-domiciled, their worldwide assets (above the nil rate band of £325,000) will be liable to IHT in the UK at a rate of 40%. They may also be liable to taxation in their country of residence.
What is a domicile of origin?
Under the laws of the UK, a ‘domicile of origin’ is ascribed to every individual at birth. If a child’s parents were married when he/she was born, then the domicile of origin will be the same as the father’s domicile at the time of birth. If a child’s parents were not married when he/she was born, or if the father dies before the birth, then the domicile of origin will be the same as the mother’s domicile at the time of the birth.
It follows that an individual’s domicile of origin will, in virtually every case, depend on the domicile of one of the parents. A domicile of origin is never lost. It can be ‘temporarily suspended’ by the acquisition of a ‘domicile of dependence’ or a ‘domicile of choice’, but it remains in the background ready to fill any gap that would otherwise arise. In this way, an individual is never without a domicile.
When evaluating the location and value of your global assets – especially if you are a British national who resides overseas and does not intend to return to reside in the UK – it is, therefore, essential to know where you are domiciled under UK law. Unless you have shed your UK domicile of origin in favour of another domicile of choice, you will still be exposed to IHT.
What is a domicile of choice?
To establish a domicile of choice outside the UK, you must demonstrate that you have settled in another country with the intention of staying there permanently and have adequately severed ties with the UK. This is not a straightforward process.
If a person has acquired a domicile of choice but then leaves the place in question with the intention of abandoning his/her permanent home or indefinite residence there, the person will automatically revert to their domicile of origin. This will then apply until he/she acquires another domicile of choice.
The 2008 Court of Appeal ruling in Barlow Clowes International Ltd & Ors v Henwood shows the difficulties of changing domicile status and the need to evaluate it constantly. Peter Henwood was born in England with an English domicile of origin but in adulthood successfully acquired a domicile of choice in the Isle of Man.
In 1992, Henwood and his wife moved to Mauritius. By leaving the Isle of Man, he ceased to live there permanently and gave up his Isle of Man domicile of choice. He lived in Mauritius from 1992 to 2005, made a will under Mauritius law and purchased a burial plot in Mauritius. The question for the Court of Appeal was whether he had obtained a Mauritius domicile of choice during this period of time?
Henwood had not maintained any strong ties with England, had lived in Mauritius for 13 years and certainly had no intention to return to England. During those same 13 years, however, he and his wife had also spent a lot of time in France, where they had a property and many personal possessions.
The Court of Appeal held that it was not possible to determine by their actions whether the Henwoods had definitively chosen to permanently reside in France or in Mauritius. As such, Henwood was found to have failed to acquire a new domicile of choice in Mauritius and his UK domicile of origin was reactivated.
How to acquire and maintain a domicile of choice?
An individual who wished to acquire a domicile of choice to replace their domicile of origin must both reside in the new chosen country and form a clear and fixed intention of making their permanent home or indefinite residence there.
To demonstrate a change of domicile, every event in a person’s life may be relevant and any evidence that can reasonably be gathered can be taken into account. Declarations of intent to remain permanently or to retire in a place are important, but they must also be consistent with your actions. There is further a need to adequately sever ties with the UK.
Domicile is complicated and you should always seek professional advice. The most effective route is to obtain a legal opinion to verify that a non-UK domicile of choice has been established.
With an increasing number of expats in Portugal now approaching the end of their NHR status, it may be time to consider what their next move should be – either by seeking certainty that a client has acquired a domicile of choice or by taking steps to legally reduce your exposure to UK IHT.