The UK Inheritance Tax Traps that British Expats Should Avoid

Inheritance Tax Traps

The UK Inheritance Tax Traps that British Expats Should Avoid

It is very important that you have a will in place for when you pass away. There are a number of benefits that come with having a will, including the fact that you can choose who will be in charge of distributing the assets that make up your estate. Not only that but your will also outlines where you would like your different assets to go. Of course, the various elements that make up your will vary depending on whereabouts you live and the size of your estate.

What Does Domicile Status Mean?


A lot of the time, when we hear the term “domicile”, we take it to mean the place that we live. Whilst this makes sense, it isn’t the case in English law as it has a much more powerful meaning attached to it. In English law, when you hear the term domicile, you should take it to mean the country that you are most strongly and deeply connected to, regardless of where in the world you are currently living. You need to keep this in mind when you are preparing your will because the answer can have a number of different legal (specifically tax-related) ramifications.


In English law, everybody has a domicile somewhere, which only applies to one place at a time. We are regarded as obtaining a “domicile of origin” the minute we are born. We usually acquire this from the domicile of our father. Sexist undertones aside, the domicile of origin remains attached to us throughout our entire lives unless later on, as an adult, you replace your domicile of origin with a domicile of choice.


If you are hoping to replace your domicile of origin with a domicile of choice, then you are going to need to move to that specific jurisdiction with the intention of staying there indefinitely.


Different Inheritance Tax Traps for UK Expats


Inheritance tax traps can take a large chunk out of what you leave for your beneficiaries. Experts will be able to look at your estate and work out exactly how much you owe, but inheritance tax can end up cutting your bills short by about 40%. This will apply to a person’s estate unless they can demonstrate that a change of domicile occurred before the IHT event took place. The different forms of IHT events include either death or the transfer of valuable assets.


To put it plainly, a British national could leave the UK, pass away in the country they move to, but still be liable to pay a UK inheritance tax of 40%. There are a lot of British expats who live away and don’t intend on moving back to the UK who are not fully aware of this potential tax trap. Many people seem to assume that when they move, their domicile of origin will change with a domicile of choice.

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The law states that during the first three years after you have left the UK, you will still be treated as a UK domicile for inheritance tax purposes. If you survive those three years and continue living in that country, you need to provide sufficient evidence that your domicile of origin should be replaced with your domicile of choice. The standard of proof required is beyond all reasonable doubt, which is the same standard that applies in criminal court. This means that HMRC will be quite strict when reviewing evidence for someone who could potentially be responsible for a large amount of inheritance tax.


What Kind of Evidence Should You Supply?


There isn’t a set checklist that exists that lays out all of the different pieces of evidence you should supply that show your domicile of origin has been replaced. The thing that you need to keep at the front of your mind is whether or not you can demonstrate that you plan on staying permanently in the country you have moved to. Some of the most effective ways that you can do this are by showing you have a strong personal connection to the place, such as family and friends. You could also show this on a professional level, for instance, if you have set up a business in the country or if all of your business connections currently live in the country. You also need to prove that previous business connections in the UK no longer exist.


There is a common misconception that buying a burial plot in that country will suffice. Granted, this isn’t a bad measure to have in place as it does show intention to remain there, but it simply won’t suffice on its own. You should state in your will what your domicile position is, as it is always good to have a record containing all of the relevant facts that you would like to be considered at the time of your death. Don’t avoid writing your will!


Other Tax Traps for Expats


It is worth noting that there are several other potential tax traps that you should be aware of. These include:


  • A whole case that ensures you show you have changed your domicile of origin can be undone if you become a UK tax resident once again, even if you are only doing so for a short period of time.
  • The normal unlimited inheritance tax exemption for spouse transfers does not apply if your donor spouse is a UK domicile.


Do You Need Help with Your Will?


As mentioned above, a good way that you can clearly highlight your domicile is by including such information in your Will. As such, it is important that you put a valid will together. If you need help doing this, then be sure to speak to Norfolk Will Writing. Our team of experts will be able to help you put your Will together in a way that helps both you and your beneficiaries. If you have any questions or require further information, do not hesitate to get in touch.

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