UK Inheritance Tax Pitfalls UK Expats Should Avoid

Every few years, the British media is inflamed with stories about so-called ‘non-doms’ – wealthy foreign nationals who reside in the UK but live elsewhere.

This status can confer significant tax advantages if non-dom sources of wealth are kept outside the UK. ‘Ordinary’ Britons living in the UK have no choice but to pay income, capital gains and inheritance tax around the world.

The optics of this tax benefit might attract some press attention if, say, you’re the Chancellor of the Exchequer and your spouse is a wealthy non-dom.

However, this article will not comment on the politics around the controversial tax status leak of Akshata Muthy (wife of former Chancellor Rishi Sunak), but rather explain why it is important for Britons who no longer reside in the UK. , to consider the technical details. around residence status.

Brief overview

When we hear the word ‘home’, we often take it to mean something like ‘the place where I live, right now’.

In English law, however, it has a much more powerful and enduring meaning. Instead, think of it as “the country you are deeply and strongly connected to, no matter where you live right now.”

This is important, because it can have all kinds of legal and, in particular, tax consequences.

Domicile status

According to English law, everyone has a domicile somewhere, and only in one place at a given time.

We are all considered, according to English law, as having obtained a “domicile of origin” at our birth. Reflecting the era in which the domicile laws were written, we normally acquire our original domicile upon birth from our father’s domicile.

Beyond the somewhat sexist application of the law, this original domicile accompanies us throughout our lives unless it is replaced by a “domicile of choice” acquired in adulthood.

In order to replace an existing domicile, such as an original domicile, with a new domicile of choice, a person is required to move to another jurisdiction with the intention of remaining there permanently or indefinitely.

Tax traps

It is a fact which is not always fully understood that while a Briton who ceases to be a UK tax resident generally becomes much less, if at all, exposed to UK income tax or capital gains tax, the estate of such a person remains fully liable to UK tax. inheritance tax (IHT) (nominal rate: 40%) – worldwide. Unless they (or rather, more generally, their trustees or executors) can demonstrate that a change of domicile occurred before the relevant “IHT event” took place. The relevant IHT events are primarily either the transfer of assets of value to a trust or death itself.

In other words, a British national could leave the United Kingdom to live in a new place, die several years later without ever having returned to live in the United Kingdom, while retaining all of their estate, and not only the remaining assets in the UK. —taxed at 40% by HM Revenue & Customs.

In our experience, many long-term UK expats residing abroad are not fully aware of this potentially very costly pitfall. The obvious way to avoid this trap is for a person to declare that they have changed domicile. In other words (to return to our technical introduction), their original domicile has been replaced by a chosen domicile. Unfortunately, this is not always an easy thing to demonstrate.

The first hurdle is that for the first three years or so after leaving the UK, tax law states that you will be treated as domiciled in the UK for IHT purposes in all cases.

Assuming you survive those first few years, the next hurdle is to meet the threshold of proof needed to show that your original UK home has been abandoned for a new home of choice. The standard of proof required is the same as that used in criminal prosecutions: “beyond a reasonable doubt”, rather than the civil test of “on the balance of probabilities”.

This means that HMRC will pursue all cases where there is a reasonable amount of IHT at stake and the taxpayer’s submissions regarding the change of domicile are considered low.

Evidence required

There is no prescribed checklist for changing your domicile status, but ultimately you must have a demonstrable intention to permanently stay where you claim to be domiciled. This must be supported by evidence of strong personal, family, social and, as applicable, investment and business relationships in your new place of residence. There must also be proof that all equivalent connections in the UK have been cut.

When the clubhouse conversation about home takes place, the old story of having a burial ground in the local cemetery is usually told. Of course, it helps to have one lined up, but, on its own, a burial plot or any other piece of evidence won’t be enough.

Clients are advised to consider preparing a signed statutory declaration stating their domicile. This will act as a contemporaneous record of all relevant facts and circumstances, ready to be deployed to defend a new home claim when the time comes.

Other home traps

There are a few other pitfalls to be aware of.

Firstly, even careful planning to ensure the credibility of a change of domicile can be undone if someone becomes a UK tax resident again, even for a short time.

Under a relatively recent change in the rules, in such a case, the original domicile will be deemed to be restored as long as the person is a resident of the UK. This risks taking an unfavorable position for HMRC, even if the person concerned subsequently ceases to be a UK tax resident and never ceases to live in their chosen domicile.

Secondly, it should be noted that the normal unlimited exemption from IHT for transfers between spouses does not apply if the donor spouse is domiciled in the UK and the surviving spouse is not domiciled in the UK. UK.

For example, a country like Monaco is a place where nationals of many countries live together. It is not uncommon for a British expat to marry a non-British spouse. If the UK spouse dies while deemed to be domiciled in the UK, even if living in Monaco at the time, as described above, leaving significant wealth to the non-UK spouse, an IHT of up to 40 % may be charged on transfer value. .

A discussion of some potential steps that can avoid this scenario is beyond the scope of this article, but it is still something to keep in mind when discussing IHT and estate planning in general.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Faulkes is the CEO of Abacus Trust Group.

The author can be contacted at: [email protected]

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