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Inheritance Tax Planning Considerations for British Expats Abroad Who Remain UK Domiciled for UK Inheritance Tax Purposes Image

Inheritance Tax Planning Considerations for British Expats Abroad Who Remain UK Domiciled for UK Inheritance Tax Purposes

March 14, 2022


Inheritance planning and UK domicile - what you need to know


For those British expats who have established a new life in countries such as Spain and Portugal it might seem like there’s not much more to worry about, particularly if you have a residency visa, own a home and have taken care of important financial assets such as your pension.


If you haven’t looked at IHT planning, however, then your retirement in the sun may not be as carefree as you had hoped.


A cautionary tale

Actor Richard Burton moved to Switzerland in the late 1950s to avoid paying UK tax on his earnings and assets. He passed away at his home there in 1984.


Yet almost three decades of residence in Switzerland did not prevent HMRC from claiming that UK inheritance tax was due on Burton’s estate, arguing that he was domiciled in the UK, not in Switzerland. What decided the case was the fact that Burton had, some years earlier, purchased burial plots for himself and Elizabeth Taylor in Pontrhydyfen, Wales. This was sufficient for HMRC to successfully argue that Burton had always considered the UK his true home, or domicile, and some £2.4 million was taken from his estate to pay inheritance tax.


What this story tells us is just how complex and knotty changing one’s domicile can be. For British expats in Spain and Portugal it’s an issue that should play a significant role in tax planning, especially with regards to your estate. Living overseas – for years or even decades – may not protect you from a 40% tax on your assets after you pass, reducing what can be passed onto your heirs.


What is UK domicile?

Domicile is a complex concept under UK law but principally refers to the country that you call your permanent home. And it’s this that will determine one’s liability for inheritance tax, rather than where you currently reside or where your assets are located.


Domicile has a specific legal definition beyond simply describing the place where you live. Your domicile of origin is the domicile acquired at birth – it is typically taken from your father, or your mother if you were born after your father’s death or if your parents were unmarried.


Changing your UK domicile

It’s possible to change your domicile by moving to a new country on a permanent basis – known as domicile of choice. However, this is a tricky process as there are no fixed rules or requirements, and simply living in another country does not necessarily demonstrate a change of domicile.


The burden will fall upon you to prove evidence of your intention to live there indefinitely, and HMRC will consider the ties to your domicile of origin when making a judgement. Factors that they will cover include your intentions over your lifetime; business interests; permanent residence and other property ownership; social and family ties; and any will that you might make.


British expats in Portugal and Spain who claim to be non-UK domiciled for inheritance tax purposes will be subject to an intensive examination by HMRC covering the areas above. If you retain significant links to your domicile of origin then HMRC is unlikely to rule in your favour.


Other factors affecting UK domicile

There are other rules to be aware of when claiming non-UK domicile. Bear in mind that you cannot be without a domicile, and can only have one domicile at a time. You are normally domiciled in the country where you have your permanent home, and your existing domicile will continue until you acquire a new one.


Domicile is also separate from residence and nationality, and registering to vote as an overseas elector is not typically factored in when deciding on UK domicile.


Deemed UK domicile

The UK also has deeming provisions that affect the following: those born in the UK with a domicile of origin; those who have ever held a British domicile and non-UK domiciled individuals resident in the UK for 15 of the last 20 years. All are now deemed to be UK domiciled for tax purposes.


Planning for the future

If you do decide to change your domicile then you must completely sever links with the UK and establish a new main home in the country where you want to become domiciled. You will also need to complete four tax years of non-residence in the UK.


Should you be successful it’s important to seek expert tax planning advice and carefully plan for the future as making the wrong move could lead to inadvertently triggering UK domicile again. Scenarios where this might happen include if you return to the UK for more than one year (if the UK is your domicile of origin and your place of birth). This might happen should you decide to return to the UK for medical reasons or end-of-life care. If HMRC does decide to reclassify you as UK domiciled then your worldwide estate will once again become subject to UK Inheritance Tax.


Sound and comprehensive tax planning and more specifically inheritance tax planning, therefore, is essential when planning for a future living abroad, so you can protect your estate for your beneficiaries.


Give us a call today on +44 207 998 0570 or e-mail enquiries@fwm.gi to book your free, no obligation consultation to discuss your specific cross-border financial planning needs.

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