Residence and Domicile - a brief overview

Questions surrounding residence and domicile are a major consideration for anyone considering living abroad.

Domicile can often be overlooked as a complex aspect but there are guidelines and could be important with regard to inheritance tax. Someone moving abroad to eliminate or reduce inheritance tax it is a vital factor. 

It can be important to lose UK domicile in order to avoid UK inheritance tax on overseas assets. It is also an important consideration in general law and will impact on succession law.

There are two main types of UK domicile:

• A domicile of origin which is given to you at birth and based on your parents domicile.
• A domicile of choice where you can choose a new domicile 

If you were born in the UK to UK parents and wish to move outside the scope of inheritance tax then you will need to establish an overseas domicile of choice to hold your assets overseas. 

If you are planning to leave the UK in order to avoid inheritance tax, you need to look at this completely separately to leaving the UK in order to avoid capital gains tax or income tax. 

The difference is that you will only need to lose your UK resident status in order to avoid income tax and capital gains tax, however, in order to avoid inheritance tax, you will also need to lose your UK domicile status. The scope of domicile is much wider than the scope of residence as it does not only involve losing your residence status, but it also involves severing all ties with the UK and showing a clear intention to live in the country of your new residence permanently.

There are two aspects to establishing an overseas domicile:

• There is a requirement to have residence in a particular country.

• You need to have an intention to live there permanently or indefinitely. 

Keeping your UK domicile means that you are still within the scope of UK inheritance tax on your overseas assets, meaning that, after UK reliefs have been offset, any cash in offshore accounts or overseas properties are consolidated with your UK assets, which include your house, car, investments etc. and are will still be subject to UK inheritance tax. 

Losing your UK domicile means that you will only be liable for inheritance tax on your UK estate, meaning that any overseas properties, investments or any other overseas assets will not be liable for UK inheritance tax. 

You can also actually extend the benefit of only being taxed on your UK estate by using an offshore company to hold your UK assets. This would then also take those UK assets held by the offshore company out of the scope of UK inheritance tax. 

The reason for this is that you will no longer be classed as owning UK assets, but instead you will be classed as owning shares in an offshore company. Shares in any offshore company would be outside the scope of inheritance tax for you if you have lost your UK domicile status. 

There are clear benefits to losing your UK domicile status, but often it is unclear how to actually lose that status. 

One requirement is to establish an overseas residence. This essentially means that you will need to establish a home overseas. This does not necessarily just mean your tax residence, but would need to actually include your main residence. 

If you have multiple homes in different countries then your position is less clear and you would need to look for the ‘sole’ or ‘main’ residence. 

If you do have more than one overseas home, then clearly establishing one as your favourite and which is your real home is advisable. 

It should be noted that once you have lost your actual UK domicile, you are deemed UK domiciliary for 3 years after you leave the UK. This means that within the first 3 years of leaving the UK you would still be within the scope of UK inheritance tax and therefore the best that you can hope for is to be outside the scope of UK inheritance tax on your overseas estate after a 3 year period from leaving the UK. 

This actually assumes that you would lose your UK domicile when you leave the UK, so it would be very important to establish your residence and intention firmly overseas. If you were to regularly visit the UK for example, this would cast doubt over your intention to live overseas and is therefore not advisable. 

There are many countries that do not have any form of inheritance or estate taxations. Countries with no inheritance estate tax are Australia, Canada, China, India, Mexico, Russia and Sweden. If you are looking for a country with low taxes generally then the ones to look for are generally Channel Islands, Cyprus, Gibraltar, Malta and The Isle of Man.