No doubt not the primary reason for moving away, but there are cases where a person or couple might believe that the value of their ‘estate assets’ on death might trigger their family paying UK Inheritance Tax and therefore may look at whether there is merit in moving to another jurisdiction, for example, to live in Australia.
Such persons may have heard that Australia does not have ‘Inheritance Tax’ and with the apparent attractiveness of the lifestyle and warmer climate, they believe that a move could be the right choice for them and for the protection of their estate for their family.
They understand that ‘residential status’ for tax purposes becomes a factor and that if they cut ties with the UK and own a property in Australia and live there for a number of years, their estate would not be subject to UK Inheritance Tax.
Is there truth in such belief? What is the tax position?
‘Residency’ and ‘Domicile’
How your estate will be taxed depends not only on where you live (your ‘residency’) but on your ‘domicile’.
For someone who moves to Australia permanently and lives there for (say) 20 years, it is likely that they will have acquired a domicile (of ‘choice’) in Australia as being resident outside the UK.
Therefore domicile is not the same as residency for tax purposes – they are two completely separate matters.
Tax residence is based on a person being present in the UK over the course of the tax year for a certain number of days.
Domicile is about a person’s long-time home. Possessing a UK passport does not necessarily mean that you are domiciled in the UK but it is an indication of someone’s intention to spend the rest of their life in the UK.
What is the UK IHT Allowance?
Typically, IHT is a 40% levy on qualifying assets worth over £325,000 where non-spouses or charities are not inheriting. There may be an additional allowance of £175,000 called the ‘residence nil-rate band’ subject to various conditions. Thus, the combined allowance for a UK couple with children might be £1m.
Domicile can have implications in relation to the succession of assets and could, in theory, determine how an individual’s estate is passed on in the event of their death, particularly if they own property or financial assets abroad as some countries restrict how assets can pass after death.
Types of ‘Domicile’
Domicile of origin: is what applies to someone at birth. This is normally determined through their parents’ domicile. It can be different from where the individual is born. A person is domiciled in the UK for example, if their parents were both born in the UK.
Domicile of choice: A person may acquire a different domicile by moving permanently to another country to live. An individual can only change their domicile when they are an adult. It is only possible to have one country of domicile at any time.
Deemed domicile: applies only for the question of taxation and is based on how many years you have been resident in the UK.
Domicile of dependence : which applies by operation of law for persons because of their lack of legal capacity and legal dependence upon another person.
How do you determine where you are ‘domiciled’?
This can be difficult for some people to establish, and particularly for those with connections to more than one country.
Our HMRC will treat you as being domiciled in the UK if you either lived in the UK for 15 of the last 20 years or had your permanent home in the UK at any time during the last three years of your life.
How are you taxed if you are domiciled outside the UK?
If your domicile is deemed to be outside the UK, generally the situation is that IHT is still paid on your UK property or financial assets (but not on certain excluded assets). Just also take note that for assets that appear to be non-UK based but where the value passing to them comes from UK estate, they may be deemed to be UK assets for Inheritance Tax.
What is the UK IHT Threshold?
An individual with UK assets that are subject to IHT could have a UK inheritance liability.
For a non-UK domiciled person, they also have a ‘nil-rate band’ allowance, currently £325,000. If someone is non-domiciled in the UK, but their main residence is in the UK, they may also be able to claim the residence nil rate band of up to £175,000.
How is the question of domicile and the IHT Position dealt with and by whom?
It is the executors or personal representatives of an estate to show that the deceased was non UK-domiciled at the date of their death.
Usually this would involve proving that the deceased was present and tax resident in their new country and that they lived there permanently and never intended to return to the UK to live.
Hopefully this article gives some general guidance. The position can be complicated depending on the circumstances and in any given case, please seek appropriate professional legal and tax advice.