International: Emigration

This is the second of two postings on the international aspects of my field of law. The first, which I posted earlier today, dealt with non-England-&-Wales people who arrive, or buy a home here. This posting deals with England-&-Wales people who leave, or buy a second home abroad.

When an English person buys a home overseas, his or her affairs can become a whole lot more complicated, and need to be dealt with carefully. Misconceptions about the situation abound, and this posting attempts to separate some of the myths from the reality.

The biggest misconception I come across regularly is the assumption by ex-pats either:

a.    that because they are English, their assets will pass on their death under English law; or

b.    that because their assets are in (say) France, their assets will pass on their death under French law.

Actually both assumptions are wrong and, if you think about it, they are inconsistent with one another as well. The important thing is not to make any rash assumptions, and to take advice on the actual situation. The real rule is, I’m afraid, rather more complicated than either of the above, and it is that:

a.    immovable assets (a term which more-or-less means the same as “real estate” – land and buildings) pass under the law of the jurisdiction where the asset is situated; but

b.    movable assets (any assets which are not immovable) pass under the law of the jurisdiction where the deceased is domiciled.

A further complication is that many other jurisdictions do not have the same rule. This can lead to an overlap (England and the other jurisdiction both claiming that their law applies) or a gap (England and the other jurisdiction both claiming that the other law applies).

Domicile is important for another reason also: the UK charges the worldwide estates of its domiciliaries to inheritance tax, but it only charges the UK-situated assets of non-domiciliaries to inheritance tax. With tax at a flat 40% on all assets over £325,000, this can make a huge difference.

That brings us to the very important question: what does domicile mean? In summary:

a.    Everybody has one, and only one, domicile at any one time.

b.    When you are born, your domicile is the domicile of your father at the time of your birth (except that illegitimate children take their mother’s domicile). This is called a domicile of origin.

c.    The domicile of origin is “sticky” – if at any time you do not have another domicile then your domicile of origin prevails. This can produce odd results (since it is possible in theory for your domicile of origin to be somewhere you have never been!) but can also produce unfortunate results, from a tax viewpoint, especially for those whose domicile of origin is English.

d.    You acquire a new domicile by making a jurisdiction your domicile of choice. To do so you have to be physically residing there and have the intention of remaining there permanently. This question of intention is one of objective fact: merely declaring “my domicile is so-and-so” (e.g. in your will) is not nearly good enough, although it can certainly help. Many people have had their domicile successfully challenged by their families or by the tax authorities. There are a large number of factors, called “badges of domicile”, which judges use to establish what your true domicile is.

Next, we come to the deemed domicile rules. These are rules that keep you in the UK’s inheritance tax net for longer than would otherwise be the case, by saying that if you were:

a.    tax resident in the UK for 17 of the last 20 tax years; or

b.    domiciled in the UK at any time in the last three years;

then you will be treated as if you were a UK domiciliary for inheritance tax purposes.

One common problem, in my experience, is that the deemed domicile rules are better known than the actual domicile rules by international clients (and sometimes by their advisers) – and perhaps this is because they are easier to understand and are far less woolly. It is therefore very important to avoid the misconception that the deemed domicile rules are the rules: they are not – they are just a limited extension to the rules and they apply for one purpose only, namely to catch some people in the inheritance tax net who would otherwise escape it. Take care to avoid that misconception: deemed domicile can only entangle you in the net, it cannot release you from it; deemed domicile does not apply to any of the other taxes, only inheritance tax; deemed domicile has no effect whatsoever on succession or family law.

Throughout this article, “England” means “England and Wales”. The law of England and the law of Wales are the same in this respect: they are one jurisdiction, so moving across that border has no more effect than moving from Hertfordshire to Hampshire. However, it is not always widely realised that Scotland and Northern Ireland are different jurisdictions: so this article does apply to an English person who moves to either of them – the only real difference being that he or she will have moved to a jurisdiction which also has UK inheritance tax.

This problem – that somewhere which you or I might think of as one country is actually divided into several jurisdictions – is quite common. Each state of the USA is a separate jurisdiction, for example. So is each canton of Switzerland. Canada and Australia are divided into a number of jurisdictions. This can affect the points analysed earlier in this article quite considerably. For example, moving to the USA and intending to stay there permanently, but not settling on a particular state, cannot give you a new domicile of choice.