There are some crucial misunderstandings amongst the British expat community when it comes to their understanding of domicile status and their tax position. These misconceptions could leave their loved ones financially exposed and could even cause trouble with HMRC if they are not paying the correct UK Tax.
UK Expats believe that they are no longer UK Domiciled
British expats are likely to have a UK domicile of origin which is acquired at birth. They can try to acquire a new domicile (a domicile of choice) by settling in a new country with the intention of living in this country permanently. However, it is extremely difficult to lose a UK domicile status and acquire a new one.
There are no fixed rules as to what is required to acquire a new domicile and the burden falls on the individual to prove they have acquired a new domicile, and often this isn’t finally decided or tested by HMRC until someone actually passes away. Living in another country for a long time, although an important factor does not prove a new domicile has been acquired. Among the many conditions that HMRC list, it states that all links with the UK must be severed and they must have no intention of returning to the UK.
Should a long term expat move from one country to another the domicile will also revert back to a UK domicile until sufficient connections are made to establish domicile in the new location.
It is estimated that 74% of UK expats who consider themselves no longer UK domiciled still hold assets in the UK, and 81% have not ruled out returning to the UK in the future. This means HMRC is likely to still consider them to be deemed UK domiciled and they would therefore face IHT on their worldwide assets.
2. British expats believe that they will only be subject to UK IHT on their UK assets
Most British expats will be deemed UK domicile upon death, this means that all of their assets that they hold and not just those that are located in the UK will be subject to UK IHT. It is estimated that 82% of UK expats do not realise this.
Before probate can be granted, the probate fee and any inheritance tax that is due on the estate must be paid. With UK IHT set at 40%, there could be a significant bill for beneficiaries to pay before they have access to their inheritance and this can also take a considerable amount of time. Setting up a life insurance policy in trust could help ensure beneficiaries have access to cash to pay the required fees and continue life whilst waiting for probate to be granted.
3.British expats mistakenly believe they are no longer subject to UK taxes after leaving the UK
All income and gains that are generated from UK property or assets will continue to be subject to UK taxes. 11% of UK expats seem to think that just because they no longer live in the UK they don’t need to declare their income, capital gains from savings and investments or property held in the UK. By not declaring the correct taxes people can find they end up being investigated by HMRC, and the penalties for non-disclosure are getting tough
4.British expats often believe that their spouse can sign documents on their behalf should anything happen to them.
44% of UK expats wrongly believe that a spouse or child or a professional will be able to manage their affairs should they become mentally incapacitated is leading people to think they don’t need a Power of Attorney (POA) in place. This could result in families being left in vulnerable positions as their loved ones will not automatically be able to step in and act on their behalf. Instead, there will be a delay whilst they apply to the Court of Protection to obtain the necessary authority.
5.British expats unsure if their will is automatically recognised in the country they have moved to
It is wrong to assume a will or POA document is automatically recognised in the country in which they move to. Often overseas law is driven by where the person is habitually resident, and the laws of that country will apply. Therefore, people may require a UK will and POA for their UK assets and a separate one covering their assets in the country they live. The wills also need to acknowledge each other so as not to supersede each other.