Living abroad isn’t out of reach of long arm of the taxman
A SUBSTANTIAL number of Britons own a home overseas and it is important to bear in mind the UK inheritance tax and administrative consequences of owning property offshore.
The first point to bear in mind is that retiring abroad may not actually help you avoid inheritance tax in the UK when you die. Our tax authorities may still seek to charge inheritance tax on your estate despite the fact that you are no longer living in the UK. When deciding whether your estate is liable to inheritance tax, the UK tax authorities do not look at physical residence in the UK but consider a strange concept referred to as domicile.
If the tax authorities deem you to have a UK domicile, they will demand inheritance tax on your worldwide assets and not just on your UK-based assets. Domicile for UK inheritance tax purposes is very hard to change and most Britons owning overseas properties will probably have retained their UK domicile, even those who have retired abroad and thought that they had avoided the UK tax authorities. The reverse applies to foreign nationals who arrive in the UK and if you have been resident in the UK for 17 out of the previous 20 years you will be deemed to have acquired a UK domicile of choice and therefore will be liable to pay UK inheritance tax on your worldwide assets.
Most UK taxpayers acquire a UK domicile at birth, known as their “Domicile of Origin”. In order to change this to a “Domicile of Choice” you must convince the UK authorities that you have abandoned your domicile of origin and have acquired a domicile of choice in another country. To do this there are two steps that need to be followed. First of all, you need to formally notify and agree your decision with the UK authorities. Secondly, you need to sever all ties with the UK by closing all British bank accounts, selling any UK property and even making funeral arrangements abroad. The Revenue can and have successfully argued in the past that you have retained your UK Domicile of Origin if your intention is to return to the UK at any point in the future even if that is for burial in the UK.
Maybe all you want is to acquire an offshore property for family holidays. Even then, you still need to consider wills and inheritance tax, both in the UK and in the overseas country. If you have an offshore property you may need a locally drafted will.
Some countries have different inheritance laws and you will need to take advice locally about what can and cannot be left to your family. If you do not have a local will it can make the administration of the estate extremely expensive and time consuming and may involve your executors getting UK wills and documents translated and may even mean them travelling to the foreign country to swear documents before a local notary. Also bear in mind that if you have a foreign will you will need to update your UK version to ensure that the execution of a foreign Will has not invalidated your UK one.
Finally, do bear in mind that that there may be inheritance tax or an equivalent thereof to pay locally on a foreign property and this foreign tax may or may not be available to set off against any UK inheritance tax liability so your family could be faced with a double tax charge. Whether you intend to remain UK domiciled or want to sever all ties with the UK it is important to obtain specialist advice in both the UK and locally about the consequences of buying and owning property abroad from both a will and tax perspective.
The consequences of not taking advice could have serious implications and it may also be that local succession laws could mean that you cannot leave the property to your family as you wish and there may be forced succession rules that apply so that you have no choice as to who inherits the property from your estate.