Most people reach an age where they must decide how they’ll divide their assets among their beneficiaries. Often, people reach their twilight years before even thinking about this, but what you must know is that it’s something you must consider doing as early as possible if you hope to dodge the UK’s monstrous inheritance tax.
For ex-pats, domicile is a term they need to understand because it’s a significant factor of how much tax your beneficiaries will be liable to pay when they inherit your assets.
Domicile is different from residency in the sense that a residence is somewhere you live for a time, while your domicile is your true home. You could be living in another country for years at a time and still be domiciled in the UK.
Anyone who is a UK domicile is subject to inheritance tax on all their assets worldwide. The current threshold is £325,000 for inheritance tax, after which it’s charged at 40%. If you are a non-UK domicile, the tax only affects assets located in the UK, like local property or businesses.
Knowing this, you may need to consider a few things to spare your beneficiaries from losing out on a considerable amount of money. It’s possible to change your domicile, but you then have to consider the inheritance tax of the country to which you’re switching your domicile. If the country has more forgiving inheritance tax rates compared to the UK, this may be the best course of action for you.
Acquiring domicile of choice
Domicile of choice is where you change your domicile by moving to a different country permanently. To acquire this, you must:
- Be physically residing in your new country
- Be a tax-paying resident of this country
- Have the intention of living there permanently
- Sever ties with the UK, which, among others, could include:
- Not returning to the UK
- Not being buried in the UK
When you apply for a domicile change, it will take a minimum of three years for your UK domicile status to be revoked. Remember that if you die and the three years since you applied for a domicile in another country hasn’t elapsed yet, your estate will still be liable to UK inheritance tax. You will also be liable if you were a UK resident for any part of 17 of the last 20 tax years. This is why it’s best to sort out your plans while you’re still young and healthy. Note that going to another country, even if it’s for a short vacation, while your domicile application is in progress, might be grounds for the HM Revenue & Customs (HMRC) to challenge your domicile by choice.
The sooner you plan out your retirement, the smoother it’ll be for you since you can take steps to free your beneficiaries from heavy taxes and find pension options available in your chosen country. TailorMade Pensions can provide you with a wide range of pension options for UK ex-pats and educate you on personal finance and other taxes you may need to look out for.