Domicile is often a primary consideration in an individual’s UK tax planning. However, claiming a foreign domicile also has implications for the administration of cross-border estates. Many high-net-worth individuals have assets in multiple jurisdictions, and the impact of their domicile is relevant to both tax and the succession of their assets when creating an international estate plan.
What is Domicile?
Many will be familiar with the term “non-dom” from the headlines. The term is rather misleading because every person has a domicile at all times: you cannot be without one. Broadly, there are three types of domicile relevant to tax and succession planning:
- Domicile of Origin
- Domicile of Choice
- Deemed Domicile
Domicile of Origin
Your domicile of origin is acquired at birth. If your parents were married, it will be the domicile of your father at the time. If unmarried, the domicile of your mother.
Domicile of Choice
Your domicile will always be your domicile of origin unless it is displaced by a domicile of choice. A domicile of choice is acquired through an intention to remain in a place permanently or indefinitely.
This form of domicile exists purely for tax purposes. A person with a non-UK domicile will be deemed domiciled in the UK for all UK tax purposes (including worldwide exposure to UK inheritance tax on death) once they have been resident in the UK for 15 out of 20 tax years.
When creating an international succession plan, it is key to remember that becoming deemed domiciled in the UK for tax purposes does not necessarily displace legal domicile.
Testamentary freedom is a fundamental concept of English law. Assets can be left by Will however and to whoever a person wishes. This is in contrast to many European jurisdictions with forced heirship regimes, which usually provide for fixed portions for certain family members.
The principle of testamentary freedom may be overridden by:
- The deceased’s assets being immovable assets (ie real estate) located in a foreign country,
- The deceased maintaining a non-UK domicile (regardless of whether they have become deemed UK domiciled for tax purposes), meaning that foreign law will apply to the succession of some (or all) of their assets, or
- A successful claim under the Inheritance (Provision for Family and Dependents) Act 1975, which provides for certain categories of persons such as spouses or children to be able to bring a claim to vary the deceased’s Will, in circumstances where it can be shown that the Will did not make reasonable financial provision for them. Importantly, this Act only applies where the deceased testator was legally domiciled in England or Wales.
When dealing with the administration of an estate, English law distinguishes between movable assets and immovable assets. The jurisdiction in which immovable assets are situated will usually govern how those assets pass to the deceased’s heirs.
In contrast, movable assets such as bank accounts, shares, paintings, yachts, and cars, will pass in accordance with the law of the deceased’s legal domicile.
Stephanos is a divorced father of two whose domicile of origin is in Greece. He moves to the UK, marries an Englishwoman and works in the City. Stephanos plans to retire to his holiday home in Greece and continues to see Greece as his home. He therefore retains his Greek domicile of origin. Twenty-five years later, Stephanos retires, but unfortunately he dies before he can move back to Greece.
As a long-term resident of the UK, Stephanos is UK- deemed domiciled for tax purposes. His worldwide estate is therefore exposed to UK inheritance tax (subject to the terms of the tax treaty). However, becoming deemed domiciled for tax purposes has no effect on his Greek legal domicile. As a result, his assets will either pass in accordance with the jurisdiction where they are located (if immovable) or Greek succession law because of his Greek domicile.
Stephanos’ English law Will leaves all of his assets to his second wife. However, by application of Greek law, his children from his first marriage are entitled to a portion of his estate*. This not only deviates from Stephanos’ wishes, but also has UK inheritance tax consequences because the spouse exemption will not be available for the assets passing to the children**.
What can you do?
To avoid any unwanted consequences of having a foreign legal domicile, you might consider taking advantage of EU law to override the English law position or reconsider your domicile claim.
The European Succession Regulation permits those with connections to the UK and most EU Member States to choose the law of any country of which they are a citizen to apply to the succession of their estate.
If Stephanos had been a British citizen, he could have elected in his Will for English law to apply. Greek law should uphold this election under the Regulation, meaning his second wife could inherit everything.
Domicile and your cross-border estate
From strict succession laws of foreign jurisdictions to high rates of inheritance tax (IHT), there are many ways in which your domicile can affect international succession planning.
The following steps are pertinent to any cross-border succession planning:
- Ensure that your Will is up to date,
- Give claims of foreign domicile due consideration and seek professional advice,
- Prepare a "domicile statement" that reflects your personal situation, and
- Consider making an election for English law to apply to your Will if you are a British national.
The key to managing domicile issues is forward-planning to avoid unintended consequences and, in some cases, contentious proceedings post-death.
*Please note this is a general statement of our understanding of Greek law. We are not qualified to advise on the laws of any jurisdiction other than England and Wales.
**For more on how Stephanos’ estate planning could be impacted by his first marriage in Greece see our previous article on matrimonial property regimes here.
With thanks to Méabh Kirby, a current trainee in the Private Client team, for contributing to this article.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2023