Advisors helping British expats to deal with their inheritance tax planning must consider asking their clients where they plan to be buried....

Advisors helping British expats to deal with their inheritance tax planning must consider asking their clients where they plan to be buried.

Absurd as it may sound to ask such a question, where an individual finally wants to be laid to rest can have a bearing on where the UK’s tax authorities, HM Revenue & Customs considers you to be domiciled for tax purposes.

Many expats change their residency status to get the most of any tax breaks available while working overseas. But this is relatively easy compared to changing your domicile.

Your domicile is usually determined to be where your father was born, and although it is possible to change it, clients may find they have a fight on their hands to prove to the Revenue that they have succeeded. For example, they would have to show they have severed all links with Britain, which would include selling any property they have here.

Mike Warburton, senior tax partner at accountants Grant Thornton, said: “There are two deemed domicile rules. The first is that if you are domiciled in the UK and you go overseas and become domiciled outside the UK for general tax purposes, you remain domiciled in the UK for IHT purposes for the first three years after you have left. That is, unless you are living in India, France, Italy or Pakistan.”

This is an accident of the way in which the double taxation treaties were introduced, said Mr Warburton.

He added: “The second relates to foreigners coming to the UK. If you come to the UK and you are domiciled outside of the UK, you are treated as being UK domiciled for IHT once you have been here for part of 17 tax years out of the last 20.”

This could mean, that if you happen to come to the UK on, say, April 3 one year, then by the time you reach April 6 15 years later, you would already have met this qualification, as you will have been resident here for part of 17 tax years, said Mr Warburton. So you would have qualified for this status in two years’ less than you might have expected.

Difficulty is added to the question of domicile because the Revenue will not give definitive guidelines on how a change in domicile away from the UK can be established if you are an expat. This is problematic for advisors who are trying to offer guidance to their clients on the best way to approach this.

A Revenue spokesman said: “We have notice of intentions in this area, and they don’t give definitive answers at all. The domicile leaflet (IR20) outlines that we will take into account particular circumstances. It is a need of law, and will depend on the interaction of circumstances.
“Generally it is about someone’s intentions, history, and what you say backed up by what your history is. It is not possible to list all the factors.”

The Revenue does not keep figures on the number of people who have successfully changed their domicile in the past year, nor does it have figures for those who have tried to. This, said the spokesman, is because the change is a legal position, and it will only be related to a tax position once it becomes necessary – which could be after your client has died.

The difficulty here is that once the individual is no longer around to plead their case, their beneficiaries and advisors would have difficulty in proving their intent without substantial documentation. It is imperative that your clients understand this, and plan accordingly if they want to have their domicile deemed as being outside the UK.

The Revenue leaflet IR20, is 72 pages long, and still gives no definitive guidance on this point. So it is no wonder it remains difficult for individuals to understand their tax position as it relates to domicile.

To add confusion, the revenue leaflet IHT18 - which is referred to in IR20 for extra reading - has been withdrawn, according to HMRC’s website, even though it is still possible to access it. But this is where an advisor can add value.

If you are not domiciled in the UK but live here, there are significant benefits available to you, said Francesca Lagerberg of accountants Smith & Williamson. But if you are domiciled here and live abroad, then you will pay IHT on all of your assets worldwide at 40 per cent for any amount in your estate worth more than the current nil rate band of £285,000.

Ms Lagerberg added: “We have not got a high threshold in the UK, and with things like the pre-owned assets rules and other changes, it has limited the scope to reduce any IHT liability.”

Pre-owned assets legislation was designed to prevent parents giving their home to their children before they die, for example, and continuing to live there. This would have been considered to be outside the IHT net if the parents survived the gift by seven years, and with the average house price edging ever nearer to the £200,000 mark, was an effective way of reducing the IHT liability.

However, to stop this happening, the UK Government has introduced new rules which mean that if you do this, the Revenue will consider you are deriving a benefit from that “pre-owned” home. The consequence is that you will pay a tax based on the current market rent of that property.

Of course, even if your client has assets that are outside of the UK tax net, the chances are they could be taxable in another jurisdiction, said Ms Lagerberg. This could mean that you have to familiarise yourself with other IHT regimes to ensure you give the best advice.

However, one simple way to negate all of this good planning, said Mr Warburton, is to say in your will that you wish to be buried in the UK, perhaps next to a family member. The Revenue will see this as not having completely severed your links with the UK, and your assets will be taxed under UK rules.

Robert Maxwell said in his will that he wished to be buried on the Mount of Olives in Jerusalem, said Mr Warburton.

“He did this because he wanted to end his days outside the UK to protect his non-domiciled status,” he said.