Your domicile status and liability to UK inheritance tax

One of the most financially damaging taxes facing wealthier British families is UK inheritance tax.

Living in Malta does not automatically protect you since liability does not rest on residence but on domicile.

Domicile is a complex UK common law concept. If claiming a change of domicile, the onus is on you (or your family when inheriting your assets) to prove you were non-UK domicile at the date of death, in the event of a challenge from HM Revenue & Customs (HMRC).

Anyone who is UK domiciled or deemed UK domiciled is liable to inheritance tax on their worldwide assets. The current threshold is £325,000 per individual, with tax charged at 40 per cent.

Transfers between spouses are exempt. However, if the beneficiary spouse is not a UK domicile, tax is payable above the normal nil rate band, unless they elect to be treated as a UK domicile for inheritance tax purposes.

Assets situated in another country may also be liable to inheritance tax there, although in most cases the UK would give credit for the tax paid overseas.

If you are a non-UK domicile you are only liable to tax on assets situated in the UK.
Under UK law, your place of domicile does not have to be the country where you have your closest personal association. You can live in Malta for many years and remain a UK domicile.

The basic rule is that you are domiciled in the country where your life is centred and which you regard as your homeland.

There are three types of domicile under English law:

• Domicile of origin – a child takes their father’s domicile of origin at birth, not necessarily the country where you are born. A child of a single mother takes her domicile;

• Domicile of dependence – applies to women married before 1974, children and mentally incapable people; and

• Domicile of choice – can be acquired by moving permanently to another country.

To acquire a domicile of choice you must be physically present and a tax resident in your new country, in this case Malta, and have formed the intention of living here permanently and not foresee any reason to return to the UK.

You need to sever as many ties as possible with the UK. This includes disposing of property; resigning from memberships; cutting business interests; scaling down bank accounts and investments and setting up new ones here.

You should be careful about the number of trips you make to Britain. Even stipulating in your will that you wish to be buried in the UK will count against your case. HMRC will look for any indication you regard the UK as your homeland and may return permanently one day.

It takes at least three years to shed UK domicile for inheritance tax purposes. You are deemed domiciled in the UK for inheritance tax if you were UK domiciled at any time in the previous three years or resident in the UK for any part of at least 17 of the last 20 tax years.

Although the link to domicile of origin can be removed, it is not destroyed and can be instantly reinstated. If you leave Malta and move to a third country, you would re-acquire your UK domicile of origin unless you can demonstrate that you have established a new domicile of choice.

Inheritance tax is often described as a ‘voluntary tax’ since tax planning devices are available to mitigate or avoid it. This applies whether or not you have a UK domicile, but for expatriates domicile is a key factor in inheritance tax planning.

There are a number of ways in which your domicile status can be satisfactorily tested, but professional guidance is required. If you get it wrong your heirs could receive an unexpected tax bill.

If you have a worldwide estate worth over £325,000, you need to take professional advice from a firm which is highly experienced in dealing with UK domicile and inheritance tax and on how the Malta/UK double tax treaty affects an expatriate’s tax position.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised and an individual is advised to seek personalised advice.