Will I avoid inheritance tax on my estate because I moved to Australia?

I wonder if you could shed some light on the inheritance tax issue?

As I objected to paying inheritance tax, I decided to apply for a retirement visa to live in Australia in 2004. I also needed the sun.

Shortly thereafter, the rules for such visas changed. The question of “residential status” for tax purposes became a factor.

I finally left the UK in 2005. As all my income (from pensions) is based in the UK, I only pay tax in the UK.

My understanding was that if I only owned property in Australia, showed that my ties to the UK were severed (only occasional trips back to visit relatives) and lived here long enough, my property would be outside the scope of any tax claims on succession from the UK government.

Australia, being a far more enlightened country, doesn’t have this death tax – pay while you’re alive and you’ll still be robbed when you die.

Although I am not rich, my estate is likely to exceed the current UK inheritance tax threshold.

I am divorced (this was in the UK) and have not remarried. My estate will be left primarily to my grandchildren and children (all living in the UK).

Am I correct in thinking that I will be exempt from inheritance tax after being ‘outside’ the UK for 18 years?

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Heather Rogers replies: How your property will be taxed depends not only on your residency but also on your domicile.

This is important and so I will explain in more detail how this works and how it relates to your case below.

But in short, having moved permanently to Australia and been there for 18 years, you appear to have acquired domicile of choice there as well as residing outside the UK.

There are other relevant issues you should be aware of based on the personal information you provide that are worth flagging in advance.

– Any natural person with UK assets they may still have a UK inheritance tax liability even if they are domiciled and living elsewhere when they die.

– Pensions are exempt from inheritance tax (see box below for how inheritance pensions are taxed).

Hopefully the above and what follows will give you some general guidance, but as you can see before I even get into the details, the answer to your question depends on your particular financial assets and circumstances.

You should therefore consult a professional tax accountant in Australia – ideally one with experience of working with overseas UK clients – for an individual answer to your question.

It may be worth consulting a solicitor in Australia who also works with expats from the UK, as the issue of residency often falls better within their remit.

Domicile and domicile: What are they and how do they differ for tax purposes?

Domicile is not the same as residence for tax purposes – they are two entirely separate matters.

Tax residence is based on a person’s presence in the UK during the tax year for a specified number of days.

Residence is for a person’s long-term home. Holding a British passport does not necessarily mean you live in the UK, but it is an indication of someone’s intention to spend the rest of their life in the UK.

By itself, however, it does not give residence. Residence is different from nationality.

The government has details of tax residency as opposed to domicile here.

Why is residency important?

Domicile is used to determine a person’s tax position, including where they pay income tax, capital gains tax and inheritance tax in both the UK and the country they live in.

It also has significant implications in relation to the inheritance of assets and could therefore determine how a person’s estate is passed on in the event of their death, particularly if they hold property or financial assets overseas, as some countries restrict how assets can be transferred pass after death.

Common law assigns a domicile of origin to each individual at birth. This is usually determined by their parents – their father’s or in the case of a single mother, their mother’s residence – and may be different from where the individual was born.

A person is domiciled in the UK, for example, if their parents were born in the UK.

Instead, a person may have a residence of choice. This can happen if you move permanently to another country to live.

An individual can change their domicile when they become of age, but it is possible to have only one country of domicile at any one time.

Meanwhile, considered domicile it only applies to your tax situation and is based on how many years you have been resident in the UK.

There is also residence of dependency which is what the law assigns to a person because of the lack of legal capacity and legal dependence on another person.

So how do you work if you live in the UK?

For some, determining their residency may be relatively easy, but for those with connections in more than one country, it may be more complicated.

HMRC will treat you as living in the UK if: a) you have lived in the UK for 15 of the last 20 years or b) you have had a permanent home in the UK at any time in the last three years of your life.

In your case, as mentioned above, the information you provided indicates that you were a resident of choice in Australia.

Anyone reading this who is in doubt about where they live should seek advice from HMRC, a professional tax accountant or solicitor.

How are you taxed if you live outside the UK?

If you are deemed to be domiciled outside the UK, inheritance tax is still payable on your assets in the UK, for example the property or bank accounts you have in the UK.

Not payable on certain excluded assets:

– Bank accounts in foreign currency

– Pensions abroad

– Authorized unit trusts and certain investments.

The rules are different for government giants and trusts.

However, care is needed as assets that appear to be outside the UK but derive their value from UK property are considered UK assets for inheritance tax purposes.

A non-domiciled person still has the standard nil rate offset which is currently £325,000.

If someone is not domiciled in the UK, but their main residence is in the UK, they may also be able to claim residence nil rate up to £175,000. See the box above for more information on inheritance tax thresholds.

Therefore, as you can see each individual with UK assets subject to inheritance tax there may be inheritance liability in the UK. However, as noted, legacy pensions are taxed differently, if at all.

Another thing worth mentioning is that if you need to move back to the UK at any time within three years of your death, then you will be deemed to be UK domiciled.

The onus is on executors to prove that the deceased was not domiciled in the UK at the date of their death.

In other words, they must prove that:

– The deceased was physically present and tax resident in his new country

– They have lived there permanently and have never intended to return to live in the UK.

Finally, let me stress again to all readers that matters such as where you live for tax purposes can get complicated and if in doubt, this is an area where you should seek professional legal and tax advice.