Many individuals leaving the UK to live abroad often assume that they are leaving behind not only th...
Many individuals leaving the UK to live abroad often assume that they are leaving behind not only the delightful summer weather but also the implications of the UK tax system.
This, in fact, is not the case. Taxes on some income and on capital gains may be avoided, but tax liabilities on wealth - such as inheritance tax (IHT) - are more difficult to leave behind.
An anticipated emigration may therefore be an opportunity for intermediaries to assist clients with their financial affairs and in doing so perhaps avoid unnecessary tax liabilities that may arise through optimism and lack of planning.
The reason potential IHT liabilities do not vanish when an individual leaves the UK is because it is not based on residence in the UK but on domicile.
Domicile is a more permanent concept than residence. Basically, an individual is domiciled in the country that is their permanent home, with default to the domicile from which they originate if no permanent base is established elsewhere.
An individual domiciled in a UK jurisdiction is liable to UK IHT on worldwide assets. It does not matter that the individual may not live in the UK. To have any chance of avoiding this comprehensive liability, the individual must lose their UK domicile, but this is not easy.
Losing UK domicile involves not only leaving the UK with the intention never to return, but also the acquisition of a domicile of choice in another jurisdiction. This means the individual must live in the new country and also demonstrate their intention is to live there permanently.
Even if the individual does manage to change domicile, abandoning their UK domicile for a domicile of choice, say in Spain, there is a further problem - IHT rules impose a UK tax burden on those deemed to be domiciled in the UK as well as on those actually domiciled here. Individuals will be deemed to be domiciled in the UK if they have been resident here for 17 out of the 20 previous tax years.
They will also be deemed to be domiciled here for three years after ceasing to be domiciled under general law. So even if someone's intention when leaving the UK is never to return, and they can show an intention to live in the new jurisdiction forever, deemed domicile will endure for another three years.
As well as the tax implications of leaving the UK, an emigrant will also have to consider the implications of arriving in the new jurisdiction.
These may, of course, include potential wealth and inheritance taxes that may apply from the day of arrival. At best, therefore, the individual may be exposed to a three-year period in which tax liabilities on worldwide assets may arise in both jurisdictions.
Such liabilities may not be mitigated by double taxation treaties since few treaties covering wealth taxes exist. Even when the individual is safely non-UK domiciled, the potential double taxation problem will remain on any UK assets, since these are always exposed to IHT irrespective of the domicile of the owner.
The emigrating individual may ponder whether UK liabilities might be avoided through non-disclosure. As ever, this is a naive approach. There are several issues to bear in mind. A topical issue at present is information exchange between taxation authorities. This is likely to be a growing phenomenon in the European Union.
Another issue to consider is that an individual dying with any assets in a UK jurisdiction is likely to require some form of probate in the UK. As a function of obtaining probate, the executors of the estate will have to consider the individual's IHT position and will render themselves personally liable to penalties if they fail to disclose the full extent of any liabilities to the Capital Taxes Office.
The Inland Revenue is increasingly enthusiastic about the investigation of IHT returns to enforce such liabilities and penalties. Even if no UK assets remain, probate records are generally a matter of public record and the Capital Taxes Office might consider embarking on a fact-finding mission if it discovers that an individual who was previously the subject of a non-residence application, and perhaps a domicile ruling, has died. This might come to light, for example, in a situation where a surviving spouse returns to the UK following the death of their partner, finding that the expatriate lifestyle no longer appeals.
IHT planning before leaving the UK will be important to protect the position of the emigrating client if it is not accepted that a domicile of choice has been established in another jurisdiction. This also applies during the inevitable period of potential double taxation that occurs even if a domicile outside the UK is established.
Such planning might also be of use in the event that the individual or their spouse does return to the UK at some future point. The precise nature of the planning may, however, depend upon the jurisdiction to which the individual emigrates.
The first factor to consider might be timing. The UK IHT regime is primarily interested in taxing an individual's wealth at death. By contrast, it is not unusual in other jurisdictions for the tax point to occur when the gift is made. So it may be important to execute any planning activities before emigration takes place.
Another concern is tax exemptions and reliefs available in the other country. Most EU countries have no blanket exemption from tax for assets passing between spouses. Where individuals are moving to a country where interspouse exemption does not exist, or is limited, any planning involving gifts between the spouses ought to occur before moving.
Planning activities will also have to take into account succession law in the new country, in case they conflict with forced heirship rules, for example. Another consideration is whether the jurisdiction in question recognises that popular vehicle of estate planning, the trust.
An individual leaving the UK to live abroad may be surprised to learn th
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