Liability to UK Inheritance Tax (IHT) is governed by domicile and it is essential to understand that the common law concept of domicile is completely distinct from residence. It is perfectly possible to be considered a resident of more than one country (or none) in a tax year, but an individual must have a domicile and can only have one country of domicile at a time.
A ‘domicile of origin’ is attributed to every person at birth and will depend on the domicile of the appropriate parent at the time of birth. Many UK expatriates fail to realise that they remain subject to UK IHT on their worldwide assets – even when they are no longer a resident of the UK – unless they have actively shed their UK ‘domicile of origin’ and established a new ‘domicile of choice’ outside the UK.
To acquire a domicile of choice, an individual must have established a primary residence in another country, where they must intend to remain either permanently or indefinitely. Provided these two conditions are met, an expat will be non-UK domiciled under general law. However, they will still remain deemed-UK domiciled for IHT purposes for three calendar years from the date on which they acquire a foreign domicile.
Because of the tenacity of the domicile of origin, the degree of proof required to establish that a domicile of origin has been displaced in favour of a domicile of choice is high. It has been held that “unless you are able to show with perfect clearness and satisfaction, that a new domicile has been acquired, the domicile of origin continues”. In practice this can mean that, while a range of evidence will normally be needed to show that a change of domicile has occurred, a single piece of evidence may be enough to show that there has not been a change of domicile.
The intention to acquire a ‘domicile of choice’ must be directed exclusively towards one country. Expats who have acquired a ‘domicile of choice’ revert automatically to their ‘domicile of origin’ if they leave the place in question and have the intention of abandoning their permanent home or indefinite residence there. They will revert to their domicile of origin unless and until they acquire another domicile of choice.
Sovereign UK has a specialist service for determining domicile status. This involves utilising our in-house team of tax experts who will engage external tax counsel to provide an opinion on an individual’s domicile. A positive counsel opinion concerning a new domicile of choice following a thorough examination of the facts and circumstances provides clients with the strongest filing position on this matter.
UK expatriates, especially those that have successfully shed their domicile of origin, may also benefit from establishing an overseas trust. Settling non-UK assets into an overseas trust can offer a number of advantages in respect of income tax and CGT planning, as well as relief from IHT.