As a UK expat living and working abroad, you might assume that you have escaped the UK tax net and have no tax implications to worry about back home. However, there is a relatively unknown concept in UK tax law that can significantly impact your financial affairs – Domicile. In this blog, we’ll explore the importance of domicile for UK expats and how it can affect your estate and inheritance tax planning.
What is Domicile?
Domicile is a legal concept that determines the country a person considers their permanent home or where they have their most significant connections. Unlike residence, which is based on physical presence, domicile is about personal status. Even if you become a non-UK resident, your domicile can remain in the UK, making it a crucial consideration for UK expats.
The impact of domicile becomes evident when considering the estate and inheritance tax implications for UK expats. If you pass away while still being domiciled in the UK, your worldwide assets will be subject to UK inheritance tax laws.
In the UK, inheritance tax is applied to an estate over a certain threshold. Currently, that threshold is £325,000 (or £500,000 if the residence nil rate band is available). Any amount exceeding this threshold is taxed at a hefty rate of 40%.
For UK domiciled individuals who are married to a UK domicile spouse, there is some relief. The entire estate can be passed to the surviving spouse without incurring inheritance tax. Any unused allowances can also be transferred, potentially increasing the threshold to £650,000 (or £1,000,000 with the residence nil rate bands).
However, the rules change if you are a UK domicile married to a non-UK domicile spouse. Unless the non-UK domicile spouse elects to become UK domicile, they will only receive the standard allowances of £325,000 (or £500,000 with the residence nil rate band), plus an additional non-domicile spouse exemption of £325,000. Any amount exceeding these allowances would be taxed at the 40% rate upon the UK domiciled spouse’s death.
UK domicile is challenging to change, and even when you become a non-UK resident, your UK domicile may still persist. To change domicile, you need to demonstrate a clear intention to permanently settle in a new country, which is not easily achieved.
While residence and domicile may seem like technical tax concepts, understanding the difference between the two is crucial for UK expats. Domicile can have a significant impact on estate planning, inheritance tax, and the financial future of your loved ones. For UK expats, seeking professional advice and assistance in navigating the complexities of domicile can ensure better financial security and peace of mind. Don’t let the relatively unknown concept of domicile catch you off guard – be informed and plan accordingly.
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