UK inheritance tax traps

Many of us dream of retiring to a place in the sun. The climate and lifestyle of locations such as Spain or Southern France have a certain appeal, particularly for those looking to slow down their pace of life. However, there are certain tax considerations for those looking to move abroad.

Domicile status

When it comes to taxation, you can only be domiciled in one place at any particular time and that place is not necessarily the country of your current residence.

Under English law, those born here typically obtain a ‘domicile of origin’ here. This stays with us throughout our lifetime unless it is replaced by a ‘domicile of choice’ when we are adults. This replacement is only made if we move abroad with the intention of remaining there permanently or indefinitely.

What does this have to do with tax?

While a Brit who has moved abroad may have limited liability for UK Income Tax or Capital Gains Tax, the same is not true for Inheritance Tax. Unless the executors of their estate can prove that a change in domicile took place before the ‘IHT event’ (usually the transfer of valuable assets or death), 40% tax on their estate will be collected by HMRC, should the estate be worth more than £325,000.

As an example: Richard moves to Spain when he retires at 65. He passes away at 85, having never returned to live in the UK, but has never claimed domicile status in Spain. His estate is worth £350,000. His beneficiaries, then, pay no Inheritance Tax on the first £325,000 of his estate, but are liable for a 40% tax rate on the remaining £25,000, leaving them with a bill of £10,000.

Of course, this is a costly trap that many expats aren’t aware of. The logical thing to do, then, is to change domicile to the country of residence – but that’s not necessarily easy to do.

Changing your domicile

For the first three years after leaving the UK, English law dictates that you must be treated as UK domiciled for IHT purposes. After this, you must be able to demonstrate your intention to remain living in your new jurisdiction in order to prove your domicile has changed.

Unfortunately, there’s no checklist for proving this. It’s simply a case of showing ‘beyond reasonable doubt’ that you never intend to return as a UK resident. There must be strong family, social and personal connections to the new domicile, as well as business connections where relevant. In addition, there must be proof that the equivalent connections within the UK have been severed.

It’s also advisable to consider signing a statutory declaration stating your domiciled position. This will help towards the case that a new domicile has been claimed.

In order to avoid the Inheritance Tax traps posed by changing your country of residence, it’s best to seek the help of a Kent tax advisor. If you have children who choose to remain in the UK, you can also advise them to seek assistance from a Kent accountant for Probate services upon your death. This means they’ll get the support they need to deal with your estate at a very difficult time.