Working Together in Prosperity

“There are two certainties in life: death and taxes.” the fact that that saying has been variously attributed to Thomas Jefferson, Benjamin Franklin and Mark Twain and that there does not seem to be any record of any of them saying it, does not make it any the less true. Nor does it make it less relevant today, even for those British expats who, having left the shores of the UK believe that the UK taxman no longer has a claim on them, inheritance tax (IHT) is becoming a real concern for increasing numbers of people, many of whom still remain convinced that it is only a worry for the landed gentry - or at worst the countrymen they left behind in the cold and rain.

In the UK , like most other countries, the link between death and taxes is forged in very strong steel, when a person leaves this mortal coil the tax man wants his share of their estate. Remember the Beatles song Taxman which has the line “they tax the pennies on your eyes”. In a country that tries to convince us all that we must make adequate provision for retirement it seems at least incongruous that unless we “spend the kid’s inheritance” we may end up leaving the government almost as much as we do our family. But then Gordon Brown was quoted as saying that the government was no less deserving of our wealth than our family was.

Being caught by the UK inheritance tax (IHT) net even if you may have been living abroad for some time depends on two tests. Where are you domiciled? where are your assets located?

Domicile

If you domiciled in the UK , your worldwide estate will be assessed to IHT when you die. For an IHT charge to arise there are two tests of domicile, the “common law” test and the statutory test.

The “common law” test questions are based on these points :

A person is only able to have one domicile at any given time. Unlike dual citizenship/nationality, for example.
Every person has a domicile of origin, which is generally speaking the domicile of the person’s father. This also is reflected in the “domicile of dependency” i.e. that of a minor child living overseas with a father of British Domicile.
If a couple married prior to January 1st 1974 , the wife of a British domiciled person is treated as having acquired the same domicile as her husband on that date.
To acquire a new domicile by choice, it is necessary first of all to move to a new jurisdiction and, secondly, one must then prove they have formed an unequivocal intention to remain permanently in that particular jurisdiction. Proving the necessary “state of mind” is often difficult, but in short no one factor will be conclusive; it is necessary to look at all the circumstances as a whole. It is important to note that the onus of proof is on the person claiming the change of domicile.

In the context of IHT, for persons coming to the UK , the onus is therefore on the Revenue to prove that a UK domicile has been acquired by choice. For persons leaving the UK , the onus is on the tax payer to prove that he has lost his UK domicile and acquired a new domicile abroad by choice.

Example 1

Mr and Mrs Jones are UK domiciled. They move to Cyprus to retire and buy a house there and live there for nine years until they are both killed in an accident. If their family wish to claim that they had acquired a new domicile of choice in Cyprus , the onus is on them to produce sufficient evidence to prove that they had formed the necessary intention to do so.

In addition to the above, there is a statutory test of domicile for IHT purposes only. Furthermore, when a UK domiciled person moves to a new country, they remain domiciled in the UK for IHT purposes until they have been domiciled outside of the UK for three complete tax years.

Example 2

Let us assume that when Mr and Mrs Jones moved to Cyprus they intended to do so permanently. Having “sold up” they left the UK on 1st May 2004 . Under the common law test it is possible that they acquired a new domicile of choice in Cyprus immediately upon arrival. However, under the statutory test they will remain domiciled in the UK for IHT purposes until 6th April 2008 . This is because in the tax year 2004/5 they were resident in the UK . It is not until 6th April 2008 that the rule which states that anyone (of whatever nationality) who live in the UK for 17 years out of the previous 20 is Deemed of British Domicile”

Even if after all the above tests you are accepted to be non domicile it does not mean that you are home free for IHT. Assets situated in the UK when you die will still be within the scope of IHT.

Examples of UK “in situ” assets are UK property (real estate), deposits at a branch of a bank in the UK . (an exception for foreign currency accounts owned by non-domiciled individuals who are also non-resident, shares or securities registered in the UK. and even
debts where the debtor resides in the UK .


Because you have severed all connection with the UK does not mean you are outside of the scope of IHT and if you are considered UK domicile, your estate will be assessed for IHT on your worldwide assets which would include for example a house owned in Cyprus .

With the expected change from a flat rate of 40% to a sliding scale up to 50% IHT could be an enormous black hole in which your wealth could fall before reaching your heirs –of course you could leave everything to a political party – such gifts are exempt!

If you wish to establish a new domicile of choice consider how you can prove that you have in fact formed the indisputable intention to remain permanently abroad. The onus of proof is on you. Remember that the UK Revenue will not give a ruling on domicile unless a chargeable event occurs and it is difficult to argue with them from the other side of the pearly gates. There are ways that you can test the revenues attitude to your domicile and of course that is where we come in!

Ross Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills, tax registration services, home, health and car insurance, investment services and tax planning, including Inheritance Tax Planning, together with full accounting services.

Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or e-mail ross@rosspays.com
Initial consultations are free and no obligation and fee quotations will be provided in advance for all services.