We pay a lot of inheritance tax on death in this country – usually 40% on anything over the first £1m owned by a married couple – and so you’d be forgiven for thinking it might be a good idea to emigrate in order to avoid tax. The weather would probably be better, anyway.
Whether or not you would be viewed as ‘domiciled’ in the UK for inheritance tax purposes, and as such liable for UK inheritance tax on death, is not an exact science. HMRC refuses to rule on whether or not a person is viewed as UK domiciled unless they take the rather drastic step of actually dying. On death, if someone is non-UK resident, HMRC will assess their continuing links with the UK and their intentions for the future during their lifetime. HMRC can even put the deceased’s executors and beneficiaries under oath to give evidence about their intentions in this regard. HMRC will then rule on whether or not the deceased was UK domiciled and as such is liable for UK inheritance tax on their worldwide assets.
If you’re at the start of this process and hoping to lose your UK domicile, you won’t be surprised to learn that the first thing to do is to leave the UK permanently. You must inform HMRC of this using form P85, and they will then work out whether you will officially become non-resident for tax purposes, using their Statutory Residence Test. If HMRC conclude that you are indeed becoming non-resident, in future UK income tax and capital gains tax will only be due on any income and gains arising on your UK property.
I saw a client recently who had apparently phoned her tax adviser years ago now and asked him, as he knew her circumstances, where she should emigrate to, to avoid tax. He went away and looked it up. “Belgium”, he concluded. Hmmm. She’s still here, but says she might call again some time to see whether the answer’s changed.
If you were born in the UK, usually you are UK domiciled, which means that you would be liable to UK inheritance tax on your worldwide assets, regardless of where you are resident. If you were to become non-UK domiciled, you would then only be liable to UK inheritance tax on your UK assets. Domicile is largely based on where your permanent home is and where you intend to live indefinitely. We all start life with a domicile of origin, which is your father’s domicile if your parents are married, or your mother’s domicile if not. Until you are 16, you can then acquire a new ‘domicile of dependency’ if your parent or legal guardian moves to a new country and their domicile changes. Domicile is not defined in UK tax legislation and there is no statutory test for it, but it is notoriously difficult to lose your UK domicile of origin.
So what can you do, if you emigrate to avoid tax? Factors that HMRC will take into account when assessing a case to see whether someone was UK domiciled are as follows: –
- Acquire a new domicile of choice overseas. Depending on the country, there may sometimes be a formal process to establish a new domicile. If there is one, be sure to follow it. Spain, for example, has a day-count test.
- Establish your residency overseas by spending at least 3 tax years living outside the UK. This by itself is not conclusive, but it will add weight to the argument that you are no longer UK domiciled, if other factors also point in the same direction.
- Sever all of your links with the UK. Here’s where it gets difficult for the majority of people, who will be leaving family and close friends behind when they emigrate. This includes selling your UK property and investments, leaving any clubs or societies, cancelling your UK newspaper subscription, educating your children abroad and minimising your UK business interests. Conversely, it’s important to put down roots in your new country and form links there similar to those you are leaving behind. You should speak and read the local language, open a local bank account, make a local Will, even book a burial plot, and generally become part of the local community.
- Do not harbour any intention of ever returning to the UK, and even if you do so privately, be sure not to leave any damning evidence that indicates you might plan to return at some point! Richard Burton failed this test despite living in the US for 27 years, because he had bought burial plots for himself and Elizabeth Taylor in Wales and Switzerland, and it cost his estate £2.4M in tax.
It was formerly possible to seek a provisional ruling on domicile from HMRC during a person’s lifetime, but that is no longer on offer. It is probably safest to ‘plan for the worst but hope for the best’ when it comes to UK domicile.
Chiltern Wills is a Will writing business based in Beaconsfield and run by former London solicitor Rebecca D’Arcy. For a free, no-obligation initial chat about making your Will and powers of attorney, or for help with probate, call us on 01494 708688 or email firstname.lastname@example.org.