The importance of domicile and inheritance tax – why it matters to your family where you are domiciled
The concept of domicile under English and Welsh law is complicated, but if you live in either the UK or France and own property in one or both countries, it will be important to your family and anyone who inherits from you.
What is domicile?
Under English and Welsh law, the concept of domicile for inheritance tax is complicated. It is not necessarily where you live, nor is it necessarily the same as your nationality or where you work.
It is instead based on numerous factors. The starting point is that you have a ‘domicile of origin’ of the country where your father considered his real and permanent home to be at the time of your birth. If your parents were not married at the time of your birth, you take your ‘domicile of origin’ from where your mother considered her real and permanent home to be at the time of your birth.
It is possible to lose your domicile of origin and acquire a domicile of choice if you move to a new country with the intention of permanently remaining in that new country.
Confusingly, under French law, domicile has a different meaning. Its definition is more straightforward and is closer to the concept of residence. Broadly speaking, if you live in France, under the French definition you are domiciled in France.
Why does it matter?
If you are domiciled within the UK at the date of your death, then HMRC will wish to tax your worldwide assets, including those in France.
If you are domiciled in France at the date of your death, the French tax authorities will wish to tax your worldwide assets, including those in the UK.
The UK and France have very different tax systems. It is not necessarily true that one inheritance tax system is more generous than the other, it will depend on your personal circumstances.
Factors such as your level of wealth, the type of assets that you own and who and how many people you choose to inherit your assets in your will, will determine the amount of inheritance tax payable.
Mary (a UK citizen) has recently passed away. Mary moved to France after falling in love and marrying Pierre (a French citizen) 30 years ago. Her move to France was permanent, and at no time after her moved did she consider moving back to the UK.
At the time of her death, Mary had £300,000 in bank accounts in the UK, and she owned a home in France.
Under her will, Mary left all her assets to her 3 nieces, who all live in the UK. Her nieces know that the inheritance tax allowance in the UK is £325,000 (broadly speaking each person in the UK can leave £325,000 free of inheritance tax on their death).
They are hoping that they can inherit the £300,000 in Mary’s UK bank accounts free of inheritance tax.
However, because Mary lived in France, she was considered ‘domiciled’ in France by the French tax authorities.
They therefore take into account all of Mary’s assets worldwide, including the money in the UK, when calculating the amount of inheritance tax that Mary’s nieces have to pay.
The double taxation treaty (which we have discussed in earlier articles) confirms that France can tax Mary’s worldwide assets.
This means that, although there is no inheritance tax to pay in the UK, there will still be inheritance tax for Mary’s nieces to pay in France.
Will this change now that Brexit has happened?
It is unlikely that inheritance tax in either the UK or in France will change in the near future due to Brexit.
The double taxation treaty, which confirms which country can tax which assets, was entered into by the UK and France many years before the EU came into being.
For more information please contact Charlotte Macdonald, Dan Harris or Raquel Ugalde at Stone King LLP either by calling +44(0)1225 337599, or by emailing: [email protected]