Deciding Domicile is Crucial for Expat Tax Planning

Domicile is one of those complicated tax issues that everyone has heard about but few really understand.

Many expats confuse the difference between domicile and residence and from that moment, all their offshore tax planning goes wrong.

Fixing domicile helps put the foundations down for two basic for the wealthy expats living in the UK:

  • Deciding how to manage inheritance tax (IHT)
  • Deciding how to manage remittance basis tax

Domicile is important as a concept in international law that links a person with a country and that country’s legal system – and from there decides how tax and legal systems in other countries interact with those rules.

Big things in life

The big things in life come down to domicile – marriage, divorce, property ownership, tax and wills.

Domicile comes in to types:

  • Origin – which is based on the domicile of parents
  • Choice – for anyone over 16 years old, a domicile of choice is based on residence

Proving domicile of choice as the place where you live is quite simple – you either live in a place or you don’t, but proving domicile on choice because you have a preference to return to live in another country at some time is more difficult.

Two major court cases determine domicile in the UK:

  • Furse v Commissioners of the Inland Revenue – Furse was born in the USA. He wanted to stay in Britain for the rest of his life on condition that if he became unable to manage his farm in England, he would return to the US. The courts decided this condition was so vague he had for all intents, taken on UK domicile.
  • Commissioners of the Inland Revenue v Bullock – Bullock was from Canada and had lived in Britain for 40 years and his wife did not want to move to Canada. He hoped he could return if he outlived her or she changed her mind. The court felt he would return to Canada if he could, therefore he was not domiciled by choice in the UK but Canada.

Excluded assets

Domicile is particularly important for inheritance tax planning as people deemed as domiciled in Britain pay IHT on their worldwide assets.

Tax advisers and accountants work hard to exclude these assets from the withering 40% wealth tax by setting up trusts.

These trusts hold ‘excluded property’ which is not taxed for IHT in the UK – some investments are considered excluded, like funds, including oiecs and unit trusts.

Other useful IHT planning tools are QROPS and QNUPS expat pensions. Assets held in both are specifically excluded from IHT computations.

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