Inheritance Tax Rules for an Expat in Australia

Living abroad can be a boon for those seeking relief from UK weather, and sometimes, UK taxes. An increasing number of people, like the Daily Mail reader who moved to Australia 18 years ago, seek to understand how their relocation impacts their liability to inheritance tax, pondering whether moving overseas spares their estates from this tax or not.

Making the Move: A Reader’s Query

The reader, like many others, emigrated to Australia in 2005, stimulated by the prospect of sunny weather. Today, their primary income comes from UK-based pensions, taxed locally. The reader’s predicament revolves around their long-held belief that by owning property solely in Australia, limiting ties to the UK, and residing in Australia for an extended period, their estate would evade any inheritance tax imposed by the UK Government.

Although not exceedingly affluent, their estate surpasses the prevailing UK inheritance tax threshold and is destined to be left to children and grandchildren, who all reside in the UK. After living overseas for nearly two decades, the reader seeks clarity on whether their estate is indeed exempt from UK inheritance tax.

Understanding Inheritance Tax Limits

To help answer their question, it is important to understand the inheritance tax thresholds in the UK. Assets over £325,000, often referred to as the nil rate band, are typically subject to a 40% inheritance tax. Individuals can bequeath an additional £175,000 in assets, including their home, without tax implications, provided they leave it to their direct descendants, which include adopted, step, foster children and those children’s linear descendants.

This additional amount is termed the residence nil rate band and applies to deaths on or after 6th April 2017. If an individual dies with these protected amounts unutilised, they can be transferred to their surviving spouse or civil partner, totaling to £500,000 per person exemption.

Disentangling the Concept of ‘Domicile’

The primary factor that determines how an estate is taxed is not merely a person’s residency but their domicile. Domicile is a legal concept that broadly refers to where a person considers their permanent home to be. It can contribute significantly towards deciding an individual’s tax status, including income tax, capital gains tax, and inheritance tax, in both the UK and the country of their domicile. It also has vital implications on how an individual’s estate is passed on after their death.

Everyone is assigned a domicile of origin at birth, usually determined by their parents’ domicile. However, a person can establish a domicile of choice by relocating permanently to another country. It’s important to note that despite having moved permanently to Australia and residing outside the UK for 18 years, the reader still could have a UK inheritance tax liability if they hold UK assets. The other fact to consider is that pensions are often exempt from inheritance tax.

Given these circumstances, it’s recommended that she consults a professional tax accountant, preferably with experience dealing with UK expat clients, in Australia for individual advice on their situation.

Deciphering Domicile for Expat Tax Matters

Residence and domicile, though used interchangeably, mean different things for tax purposes. Tax residence typically depends on a person spending a majority of their tax year in the UK. Domicile, on the other hand, reflects a person’s long-time home and influences their tax position.

Importantly, holding a UK passport alone does not necessarily confer the status of being domiciled in the UK. Even where you anticipate spending the rest of your life matters. Domicile is different from one’s nationality.

How is Inheritance Tax Applied on Non-UK Domiciles?

For individuals domiciled outside the UK, inheritance tax must be paid on UK assets, excluding certain assets such as foreign currency bank accounts, overseas pensions, and certain authorised investments and unit trusts. However, non-UK assets deriving their value from UK property are considered UK assets for inheritance tax purposes.

A non-domiciled individual is eligible for a standard nil rate band currently at £325,000, and additionally, if their main residence is in the UK, they may claim the residence nil rate band of up to £175,000.

However, specifically in the reader’s situation, if they were to return to the UK anytime within three years of their death, they would be deemed domiciled in the UK. The responsibility falls on the estate’s executors to prove that the deceased person was non-UK domiciled at death by demonstrating their physical presence and tax residency in their new country and their permanent living status with no intention to return to the UK.

Given the complex nature of such cases, obtaining professional legal and tax advice is advised.