Many clients have an overseas dimension. This could be through (i) living in the United Kingdom but working abroad or emigrating; (ii) owning a property or intangible assets abroad; or (iii) a foreign national coming to the United Kingdom, whether or not they own assets abroad.
The two main concerns are succession to property and the effect of taxation on being domiciled or non-domiciled in the United Kingdom.
For clients resident in the United Kingdom with overseas property, advice should be sought from a local solicitor to where the property is located. Ideally, the lawyer should be dual qualified in English and Welsh law as the law overseas may change not only from country to country but also state to state within a country.
When considering a will it will be important to consider European law and international tax treaties to determine which law governs succession to the estate. This is especially important if there is any real property abroad. If there are wills made out in the United Kingdom and the overseas country then it is important to ensure that any updated will does not revoke the earlier will. A revocation clause should be limited to earlier wills dealing with the specific assets.
Residence and Domicile
The Finance Act 2013 introduced a three residency tests to determine residency in the United Kingdom in any tax year from 06 April 2013 onwards. In addition, HMRC provide substantive guidance on their website for the purpose of inheritance tax, capital gains tax and income tax.
The three tests are as follows:
Automatic residence test
A person will be resident in the United Kingdom if he does not pass the automatic overseas test and during the relevant tax year:
- Has a home in the United Kingdom during all or part of the tax year and satisfied additional restrictions.
- He resides in the United Kingdom for at least 183 days per annum.
- He works a specified number of hours in the United Kingdom.
- He dies meeting specific conditions.
Automatic overseas test
A person is not resident in the United Kingdom if:
- He was not a UK resident in any of the three previous tax years and spends less than 46 days in the United Kingdom.
- He was a resident of the United Kingdom in at least one of the previous three tax years and spends less than 16 days in the United Kingdom.
- He works a specified number of hours outside the United Kingdom.
- He dies meeting specific conditions.
Sufficient ties test
This test is more general in nature:
- A person who does not satisfy either the automatic residence test or the automatic overseas test but has sufficient ties t the United Kingdom.
Generally speaking a person needs a family tie, an accommodation tie or a work tie. The longer a person spends in the United Kingdom then the fewer ties will be necessary. Although there are a multitude of options available, HMRC guidance should be sought for specific examples.
Domicile is an important concept because unlike residence an individual’s domicile is not limited to determining liability to taxation but is also relevant to succession and determining whether a claim can be brought under inheritance provisions.
The courts usually construe domicile according to the location the individual calls ‘home’. However, the courts may find an emigrant to Australia continues to be domiciled in the United Kingdom even though there can only be one domicile at any one time. There is no statutory test so it will be for the court to decide depending upon the specific circumstances.
In relation to determining domicile for tax purposes there are a number of options:
- Domicile of origin – usually determined at birth although it may not be the country of birth.
- Domicile of dependency – a minor under the age of 16 will acquire a new domicile if his father acquires a new domicile.
- Domicile of choice – although domicile is a matter of intent, it is difficult to prove a new domicile has been acquired. Several factors will need to be considered including: (i) whether any real property has been acquired in the new country and whether any real property has been sold in the previous country, (ii) whether all ties have been broken, (iii) whether a declaration of intent has been made, and (iv) whether new employment has been obtained.
The taxation of individuals according to their domicile is a complicated subject and requires specialist advice. Please contact us if you require specific guidance.
An individual’s liability to taxation depends upon their residence and domicile. It should be noted that taxation of spouses is not linked to the tax status of the other spouse.
Property transfers between spouses domiciled in the United Kingdom are free of inheritance tax whereas a transfer of property from a UK domiciled spouse to a non-UK domiciled spouse would be exempt only up to the relevant limit. In some situations it would be possible for the non-domiciled spouse to elect to be domiciled in the United Kingdom.
Capital gains tax
Normally, a non-resident of the United Kingdom for at least five years is not liable to be charged capital gains tax on disposal of assets held in the United Kingdom. However, since 6 April 2015, a non-resident will be liable for capital gains tax on the sale of residential property but if the property was purchased before 6 April 2015 only the portion of the gain falling after this date will be subject to tax. The annual exemption is available to an individual seller and they will be subject to the same tax rates as a resident of the United Kingdom.
Individuals resident in the United Kingdom who are away for part of the tax year will generally be charged for the whole tax year but HMRC may decide to split the tax year for example from the date the individual begins to live permanently outside of the United Kingdom or the date of disposal of the asset. This means that it might be better to sell property after becoming a non-resident.
A resident of the United Kingdom is liable to pay income tax on all sources of revenue wherever in the world it is sourced. A non-resident of the United Kingdom is only liable to pay income tax on income derived within the United Kingdom.
Inheritance tax is governed in accordance with the location of domicile, but real estate abroad can cause complications, especially if there are no tax treaties between the two countries, or they are outside Europe.
A person domiciled in the United Kingdom will pay inheritance tax on a transfer of assets whether or not those assets are situated within the United Kingdom. Apart from a few exceptions, a person not domiciled in the United Kingdom is only liable for inheritance tax on the transfer value of property within the United Kingdom.
Whether or not a person is deemed to be domiciled in the United Kingdom depends upon the tests laid out in the Inheritance Tax Act 1984:
- The domicile test means that a person will be domiciled in the United Kingdom if he lived there permanently within the three years preceding a transfer of value.
- The residence test means that a person will be domiciled in the United Kingdom if they have been paying income tax in not less than 17 of the 20 years of assessment ending with the year in which the transfer of value takes place.
- The deemed domicile test means that a person will be deemed domicile if they have been a resident of the United Kingdom in 15 out of the last 20 tax years.
Overseas assets are considered part of the estate of an individual domiciled in the United Kingdom for the purpose of inheritance tax and subject to any available reliefs.
If a person domiciled in the United Kingdom dies with overseas property or a non-domiciled person dies with property in the United Kingdom, professional advice should be obtained about succession as it will depend upon the specific circumstances including the different jurisdictions involved.