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I wonder if you might be able to throw some light on an inheritance tax matter?

As I objected to paying inheritance tax I made the decision to apply for a retirement visa to live in Australia in 2004. I also needed sunshine.

The rules for such visas changed shortly afterwards. The question of ‘residential status’ for tax purposes became a factor.

I finally departed the UK in 2005. As all my income (from pensions) is UK based, I only pay tax in the UK.

My understanding was that if I only owned a property in Australia, showed that my ties to the UK were cut (only occasional trips back to visit relatives) and lived here long enough my estate would fall outside of any UK Government inheritance tax claim.

Australia, being a far more enlightened country, does not have this death tax – pay during your lifetime and get clobbered again when you die.

Whilst I am not wealthy, my estate is likely to exceed the current UK inheritance tax threshold.

I am divorced (this was in the UK) and have not remarried. My estate will primarily be left to my grandchildren and children (all living in the UK).

Am I correct in thinking I will be exempt from inheritance tax having been ‘out’ of the UK for 18 years and counting?

Heather Rogers replies: How your estate will be taxed depends not only on your residency but on your domicile.

This is important and so I will explain how this works and its bearing on your case more fully below.

But in short, having moved permanently to Australia and having been there for 18 years, you appear to have acquired a domicile of choice there as well as being resident outside the UK.

There are other relevant issues to be aware of based on the personal information you provided, which are worth flagging upfront.

– Any individual with UK assets could still have a UK inheritance tax liability, even if they are domiciled and resident elsewhere when they die.

– Pensions are exempt from inheritance tax (see the box below on how inherited pensions are taxed).

Hopefully the above and what follows will give you some general guidance, but as you can see already before I even get into the details, the answer to your question depends on your specific financial assets and circumstances.

Therefore, you should consult a professional tax accountant in Australia – ideally one with experience in dealing with UK expat clients – for an individual response to your question.

It might be worth consulting a solicitor in Australia who deals with UK expats as well, as the domicile question often falls better within their remit.

Residence and domicile: What are they and how do they differ for tax purposes?

Domicile is not the same as residence for tax purposes – they are two completely separate matters.

Tax residence is based on a person being present in the UK over the course of the tax year for a certain number of days.

Domicile is about a person’s long-time home. Possessing a UK passport does not necessarily mean that you are domiciled in the UK but it is an indication of someone’s intention to spend the rest of their life in the UK.

However, on its own it does not confer domicile. Domicile is different from one’s nationality.

The Government has details about tax residency as opposed to domicile here.

Why is domicile important?

Domicile is used to determine a person’s tax position including where they pay income tax, capital gains tax and inheritance tax both in the UK and in the country where they live.

It also has significant implications in relation to the succession of assets and could, therefore, determine how an individual’s estate is passed on in the event of their death, particularly if they own property or financial assets abroad as some countries restrict how assets can pass after death.

Common law assigns a domicile of origin to every individual at birth. This is normally determined through their parents – their father’s, or in the case of a single mother, their mother’s domicile – and it can be different from where the individual is born.

A person is domiciled in the UK for example, if their parents were born in the UK.

A person can instead have a domicile of choice. This may occur by moving permanently to another country to live.

An individual can change their domicile when they become an adult, but it is only possible to have one country of domicile at any time.

Meanwhile, deemed domicile applies only to your tax situation and is based on how many years you have been resident in the UK.

There is also the domicile of dependence which is the one the law assigns to an individual because of their lack of legal capacity and legal dependence upon another person.

So how do you work out if you are domiciled in the UK?

For some, working out their domicile may be relatively easy, but for those with connections to more than one country, it may be more complicated.

HMRC will treat you as being domiciled in the UK if you either: a) Lived in the UK for 15 of the last 20 years or b) had your permanent home in the UK at any time during the last three years of your life.

In your case, as mentioned above, the information you provided points to you being domiciled by choice in Australia.

Anyone reading this who is in any doubt about where they are domiciled should seek advice from HMRC, a professional tax accountant or a lawyer.

How are you taxed if you are domiciled outside the UK?

If your domicile is deemed to be outside the UK, inheritance tax is still paid on your UK assets, for example the property or bank accounts you have in the UK.

It’s not paid on certain excluded assets:

– Foreign currency bank accounts

– Pensions overseas

– Authorised unit trusts and certain investments.

The rules are different for government gilts and trusts.

Care is needed however because assets that appear to be non-UK based but derive their value from UK property are deemed to be UK assets for inheritance tax.

A non-domiciled individual still has the standard nil rate band to offset, which is currently £325,000.

If someone is non-domiciled in the UK, but their main residence is in the UK, they may also be able to claim the residence nil rate band of up to £175,000. See the box above for more on inheritance tax thresholds.

Therefore, as you can see any individual with UK assets that are subject to inheritance tax could have a UK inheritance liability. However, as noted inherited pensions are taxed differently, if at all.

One other thing worth mentioning is that if you were to move back to the UK at any time within three years of your death, then you would be deemed to be domiciled in the UK.

The onus is on the executors of an estate to show that the deceased was non UK-domiciled at the date of their death.

In other words, they must prove that:

– The deceased was physically present and tax resident in their new country

– They lived there permanently and never intended to return to the UK to live.

Finally, let me stress again to all readers that matters like where you are domiciled for tax can get complicated and if you are in doubt this is an area where you should seek professional legal and tax advice.