Inheritance Tax  

Managing tax if the client moves abroad

  • Explain some of the tax challenges of change of domicile
  • Describe the impact of foreign laws on inheritance
  • Identify ways to manage foreign inheritance rules
CPD
Approx.30min
Managing tax if the client moves abroad
 Pexels/Pixabay

The end of the EU transition period was December 31, and many people will be making (or have made) decisions to settle in EU jurisdictions.

This may be because they have second homes and want the continued ability to enjoy those freely with no immigration restrictions, or because they are nearing retirement and sunnier climes beckon.

There are of course always considerations of local obligations that arise from acquiring tax residence in the new home country, but the continuing reach of HMRC should not be overlooked.

Individuals leaving the UK will need to consider when their UK tax residence status will cease.

There has been a Statutory Residence Test since 6 April 2013 to determine tax residence status for each UK tax year (which starts on 6 April and runs to the following 5 April).  While the test can be complicated, it gives certainty on whether an individual ceases to be UK resident for a tax year. 

There are several parts to the Statutory Residence Test. Broadly, in deciding the UK tax residence position for a tax year the Test involves counting days of presence in the UK, and a consideration of the connecting factors to the UK.

It is harder for someone who has been UK tax resident for many years to become non-UK resident. This is because there can be tighter limits to days of presence allowed in the UK to ensure such a person is out of the UK tax net for income and capital gains tax. 

Domicile

Separate to the rules on residence is a less well-known concept of domicile. It is common for people on the Continent to use the word ‘domicile’ as synonymous with ‘tax resident’ - but the meanings and associated implications for UK tax may be different. 

Domicile broadly refers to the jurisdiction in which an individual resides permanently or indefinitely. It is only possible for an individual to have one domicile at any one time, unlike tax residence.

Under general law, everyone starts off with a domicile of origin. For many people, this will be based on their parents’ domicile (specifically their father) if their parents were married at the time of their birth, if not the child will take on their mother’s domicile.

The domicile of origin continues until such time as it is superseded by a domicile of choice. Acquiring a domicile of choice occurs as a combination of choice of residence in a different jurisdiction and the intention of residence in the new jurisdiction being permanent or indefinite.

The importance of domicile in the UK for individuals of British origin who are seeking to emigrate is primarily in the context of UK inheritance tax. The liability to UK inheritance tax depends on the individual’s domicile status, rather than where they may be tax resident.