As a UK expat, you probably have UK domicile status even though you don’t live there.
Many UK expats are not aware that although they are resident in a country outside of the UK, they are most likely still considered to be domiciled in the UK for various tax purposes, the most critical being UK Inheritance Tax (IHT). If you are an expat or are planning to move abroad, being aware of the differences between UK domicile and residence and knowing the tax implications is vital.
If you are considered UK domiciled…
..your estate may be subject to 40% inheritance tax. HMRC is expected to collect £5.3 billion in inheritance tax in 2019/20.
What is domicile?
Domicile is a general legal concept and describes the country that a person treats as their permanent home, or lives in and has a substantial connection with. This can be quite complex in some cases (see more details on the government website link with useful flowcharts).
Your domicile of origin will often be the country in which you were born. However, if you were born in a country and your father was not domiciled there at the time you were born, then your domicile of origin may be your father’s country of domicile.
Many expats don’t intend to return to the UK, but move to live in different countries regularly, so do not establish a new permanent home outside the UK. Some may not cut their ties with the UK sufficiently to lose their domicile of origin even though they have been abroad in one place for many years. All of these people will remain UK-domiciled.
There have been many cases where UK expats have believed themselves to be domiciled outside the UK because they have lived abroad for several years with no intention of returning home, yet they are viewed as UK domiciled and subject to up to 40% UK inheritance tax.
Why is your domicile important?
It is an important factor when determining how your individual estate should be passed on in the event of your death or if you own property or financial assets in foreign jurisdictions. The actual management of your estate will vary depending on each situation, but it’s important to have an understanding of the rules, whether you live abroad or have assets located abroad.
If you have UK Domicile status, as an expat, your worldwide estate would be subject to inheritance tax, not just your UK assets.
It is usually very complicated to change your domicile of origin. Even if you move abroad and remain resident overseas for many years, it is unlikely that your domicile of origin will change, unless you take specific action.
HMRC’s conditions are clear, in that to be considered non-domiciled for tax purposes, all ties with the UK must be cut, and there must be no intention to ever return.
Those claiming to be non-domiciled following an inheritance must be able to prove it, should HMRC step in to claim the tax from the beneficiaries.
Making an assumption about your domicile status can have serious financial consequences but understanding where you are domiciled is not always straightforward.
Forth Capital specialises in retirement planning, expat pensions, and investments. Contact us HERE or call us at our Geneva office on 00 41 22 311 1441 or our UK office on 00 44 131 600 0625
Website of UK Government Departments: https://www.gov.uk/government/publications/residence-domicile-and-remittance-basis-rules-uk-tax-liability/guidance-note-for-residence-domicile-and-the-remittance-basis-rdr1
Office for Budget Responsibility: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/