UK expatriates may still be considered as UK domiciled and therefore will still be liable for the 40% inheritance tax on their worldwide estate after allowances. This is due to the concept of ‘deemed domicile’ which applies for inheritance tax purposes and means that even if you are not domiciled in the UK you might still be deemed domiciled if you were domiciled in the UK within the three years immediately before the transfer, or if you were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you make a transfer.
If you are long term away from the UK then there are ways in which to establish a foreign domicile which would mean you would not be liable for UK inheritance tax. Domicile is different from nationality or residence. Your domicile is your country of origin from birth, but can change to country of dependence if you are legally dependant on another person or change to country of choice if you intend to settle permanently in a country other than you previous country of domicile.
You must be over sixteen to legally acquire a domicile of choice. To do so you must settle in a country other than the one you are currently domiciled in and provide strong evidence that you intend to settle there permanently. Just because you have lived in a country for a long period of time does not automatically prove that you have acquired a new domicile. The UK is different to other countries in that if a person abandons their domicile of choice without acquiring another one then your domicile of origin is automatically reinstated whereas other countries would treat your domicile of choice as your domicile until replaced by a new one.
Due to legislation though there are now pension schemes that have emerged that offer options if you are an expat that is perhaps still domiciled or deemed domiciled in the UK such as QROPS (qualifying recognised overseas pension schemes) and QNUPS (qualifying non-UK pension scheme). It is important to note that the funds in these schemes must in majority be used to provide the members income for life and that this cannot be payable until the member reaches the minimum retirement age of 55.
HMRC are however clamping down on QROPS which now have to be registered with the HMRC before it can benefit from any tax breaks so many British expats are turning to QNUPS which do not have to be registered with HMRC.
Some benefits to the setting up a QNUPS are;
- You are able to invest more regularly and there are no limits on contributions
- You can also put a large range of assets into a QNUPS including your home
- QNUPS can make loans to its members to purchase personal assets
- Pensions are subject to 55% inheritance tax before being paid out whereas these schemes are exempt from inheritance tax
- If returning to the UK the underlying income and capital gains will be exempt from UK tax
QNUPS does not have tax relief which are available to normal UK-approved pensions. However, as this is now capped at £55,000 per year a more sensible idea is to transfer £55,000 into an approved scheme before tax has been deducted and then transfer any income that has already been taxed into a QNUPS .
It is important to note all the benefits as if the sole purpose for setting it up is the avoidance of UK inheritance tax then this could be attacked by the HMRC, professional advice should be obtained to ensure that it does meet the conditions and take advantage of the various benefits so this does not happen.
If you would like more information regarding the various UK tax implications for persons living abroad please call us on our offices Telephone Number: 44 20 7097 1385