Understanding expat tax can be complicated and although residence determines where taxes are paid, the vague definition of domicile comes into play for inheritance tax when they die.
Knowing the difference between the two is a basic block of tax planning.
Although tax residence follows where an expat lives – except in the case of Americans – domicile comes with a different set of rules that can mean even if a British expat lives in another country for decades, their estate will still pay inheritance tax in the UK when they die.
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Tax Residence And Domicile After Brexit
Moving to another country and taking up residence there does not mean your estate will escape liability from inheritance tax when you die even after Brexit.
You will pay income and capital gains taxes on your income and gains overseas, but the taxation of your estate remains tied to your domicile.
Take this example of Alan, a man born in London to British parents and grandparents. Alan was brought up in England and continued to live and work there until he was 25 years old. He then moved to work in Germany.
Alan intended to return to the UK on retirement. This intention means if he dies before retirement while still resident in The Netherlands, his worldwide assets are taxable in the UK.
Tax residence in the UK is decided by the Statutory Residence Test which is broadly based on counting the days someone spends in the UK during a tax year (April 6 until the following April 5) and their connections to the country.
Although the three year limit still applies if they die within that time even though their move was permanent. If they survive for more than three years, UK IHT may still apply to their UK assets.
Intention Sets Domicile, Not An Expat
Changing domicile is not a personal option – domicile is decided by a set of rules applied to an expat’s personal circumstances.
For instance, although Alan intends to stay away from the UK for the rest of his life when moving to The Netherlands, if he later relocates to Germany temporarily, his domicile changes with the move and reverts to the UK.
The important factor about domicile is intention – Alan’s intention when he moves between countries decides his domicile.
Wills And Power Of Attorney
Brexit also has an impact on expat wills and lasting powers of attorney (LPA) if they move to an EU27 country.
EU27 countries – especially France and Spain, which are the two most popular destinations for British expats – have different succession laws than the UK.
While Britain allows someone a choice how to divide their estate with a will, France has forced heirship rules that lay down how an estate is divided within a family.
A British resident with assets in the EU27 can override heirship laws by electing UK law should apply to their estate in their will.
This election depends on which country an expat is most connected to when they die.
So, if an expat makes a will in Britain while having no intention to move to the EU27 and then moves to the EU27 puts their election at risk by changing the country that they are most associated with.
Making More Than One Will
A solution for expats is to write a will in the UK and each country in the EU27 where they have assets.
To make them work, expats should take care that their lawyers do not contradict the terms of each will or even revoke each other.
LPAs made in the UK may not be valid in EU27 countries without a local court rubberstamping their authority, so it may be cheaper and more effective to seek an equivalent local order that allows someone the expat trusts to make healthcare and financial decisions for them.
Brexit And Expat Wills FAQ
The underlying impact of Brexit on British expats is only just beginning to emerge.
Departing the European Union is affecting lives in unforeseen ways – and wills and lasting powers of attorney are just one example.
Now seems a good time for British expats in the EU27 to reconsider their estate planning options.
What is the EU27?
Eu27 is the revamped name for the remaining 27 countries in the European Union from January 1, 2020, when the UK left the bloc.
The EU27 states are:
What is a lasting power of attorney?
A lasting power of attorney (LPA) is a legal document that appoints one or more people to aid or make decisions on someone’s behalf if they fall into ill health or mental issues.
You do not have to live in the UK to make an LPA although the order may not be enforceable in some EU27 countries.
What is domicile?
Domicile is a legal concept that covers three categories – origin, dependence or choice. Where someone is domicile is important when dealing with their foreign assets and income or how their estate is taxed and distributed on death.
Where am I domiciled?
Figuring out where you are domiciled depends on several tests. HMRC has several flow charts outlining the process for expats.
Your domicile of origin is generally the country which was your father’s permanent home when you were born. If you parents were not married, then your mother’s home takes precedence.
Your domicile of dependence follows the domicile of your carer until you are aged 16.
From 16 years old, you can adopt a domicile of choice that is based on where you intend to live permanently.
What is IHT?
IHT is short for Inheritance Tax in the UK. IHT is only charged to an estate after someone has died.
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