If you are an expat and what to do some serious tax planning, you need to know the difference between tax residence and domicile.
Both impact on the tax you will pay in the country of your birth and your new home, although domicile only becomes a problem when you have died and want to pass on your wealth to relatives and loved ones.
Even professional advisers are easily confused over domicile.
Your domicile’s usually the country your father considered as a permanent home when you were born. But your domicile may change if you moved abroad and you don’t intend to return.
HM Revenue and Customs (HMRC) publishes some guidance on residence and domicile, but to avoid any doubt to establish either, consult a tax adviser.
Domicile typically decides where inheritance is paid and how an expat’s estate is split on death.
In most countries, expats should prove they have no intention to moving to another country to show their domicile has changed. This could mean giving up a British passport, closing UK bank accounts and sell any residential property overseas.
Residence is a set of tax rules that decides where an expat has their main home – and it’s not necessarily the place where they think they live.
The rules vary between most countries but tend to set a time limit which established tax residence when passed.
Once tax residence is set, expats pay local taxes on their income and any capital gains.
Almost every country has residence based tax rules – except for the US and the tiny African nation of Eritrea.
Both adopt tax rules based on birth. If you are American and live in another country, you must still make tax filings in the US.
Inheritance tax for expats
Once any difficulties over domicile are ironed out, the next aspect of dealing with inheritance tax is pinpointing where an expat’s property, cash and investments are.
This is vital as legal systems differ between countries and can lead to money and property going to someone an expat does not intend to inherit their wealth.
British expats living in the Middle East or North Africa can expect Islamic law to apply to how their estates are tax-treated, although Dubai in the United Arab Emirates does allow expats to file a will to be treated as if drafted under British inheritance rules.
France and Spain have legal systems based on the civil code – rules imposed by Napoleon at the turn of the 18th century. These rules are completely different from those in the UK.
If wealth management and estate planning are important to you, consult a professional adviser in each nation where you have assets to make sure they go to the loved ones you wish to have them.
Expats with assets on more than one country should consider making a will in each of the places where they want to leave
It is incorrect to believe foreign courts will follow wills made in the UK or British laws when deciding how to settle an estate.
No British IHT on pensions and QROPS
Unspent cash in British pensions or Qualifying Recognised Overseas Pension Scheme (QROPS) falls outside of UK inheritance tax rules – although some income tax may be due.
The rule applies to all UK pensions.
That’s why financial advisers are so against retirement savers taking cash from their pensions and holding the money in the bank. If they die while the cash sits on deposit, the money is subject to inheritance tax, but while left in the pension, was not.
Expats also need to check any change in domicile may affect the tax treatment of the unspent cash in a QROPS.
Some countries, such as the USA, may not recognise a QROPS as a pension under local laws, which may alter the tax treatment of the fund.
Do not assume the same tax rules apply in every country.
IHT tax-free limits
From April 6, 2017, inheritance tax limits changed in the UK.
Individuals keep their £325,000 nil-rate band, but the first phase of the new main residence relief comes into force.
The relief will be worth £175,000 when fully in place by April 2020. Until then, for 2017-18, the relief is worth £100,000, which rises by £25,000 to reach the target figure in April 2020.
The nil-rate reliefs are for an individual, so add up to £650,000 for a couple plus the £350,000 main residence relief, giving couples the chance to pass £1 million on to their families free of tax.
The main residence relief is only for parents to pass their main home to children, although cash can be left if the home has been downsized or sold to pay care costs.
Power of attorney
Delegating power of attorney to a lawyer in each country where they have made a will makes sense for expats.
Moving from one place to another to sign documents or provide proof of identity can take time and costs money.
Giving local control to a lawyer is convenient and quicker than travelling yourself.
In some cases, a British power of attorney can have effect in another country.