Viewing posts categorised under: Domiciled

Are you domicile or non-domicile?

By Mark Quinn
This article is published on: 16th June 2022

16.06.22

Domicile is often confused with residence, but it is quite distinct

The law of domicile is highly complex and has wide-ranging consequences on an individual’s tax position, as the recent furore surrounding Akshata Murty illustrates, but for most British nationals here in Portugal, domicile is a key factor for UK Inheritance Tax (IHT).

Individuals only have one domicile at a time and a very loose definition is ‘where you have a permanent home’. In my experience, this is often misunderstood and individuals who thought they were ‘definitely non-UK domiciled’ after living in Portugal for several years learn that in fact, they are very much still UK domiciled.

The are several types of domicile, namely ‘Origin’, ‘Choice’, ‘Dependence’ and ‘Deemed’ but here I will focus on the first two. Firstly, ‘Origin’. This is acquired at birth, usually from your father (or your mother if they were not married at the time of your birth). This is never fully lost but can be suspended by acquiring a new domicile of choice, but it is adhesive and will revive if the new domicile is lost.

Acquiring a domicile of choice involves forming a clear and fixed intention for a new country to be your permanent home, and therefore actually requires permanent residence.

Being non-UK domiciled is highly advantageous for UK IHT
The worldwide estates of UK domiciles are assessed for IHT in the UK, even if you live elsewhere. For non-UK domiciles, generally only UK based assets are assessed. It is worth noting here, that assets that derive their value from the UK but are held elsewhere e.g. company shares, will be deemed to be UK assets.

Shedding UK domicile is tricky
The burden of proof lies with the person claiming the change and the standard is particularly onerous. There is no checklist and your circumstances are looked at as a whole. Some factors that might be considered are family and business ties, location of friends and social interests, location of assets, acquisition of citizenship or languages spoken.

The adhesive nature of domicile is highlighted by Richard Burton’s failed attempt to change his domicile, which resulted in an IHT bill of £2.4m. Despite him living in Switzerland for 26 years, structuring his assets appropriately and subsequently dying there, the revenue was successful in arguing that his ‘mind and heart’ still remained in Wales. Their evidence being his choice to have the Welsh flag draped over his coffin and being buried with a book of Dylan Thomas poems. As you can see, what can be considered is very broad.

Traps
Non-domiciles by choice with a UK domicile of origin must be very careful with return visits to the UK, especially if they have a second home there. If they die as UK tax resident (by exceeding their day count) and were also deemed UK tax resident in one of the two preceding tax years, they are automatically deemed UK domiciled and their worldwide estate is subject to IHT.

A new domicile is retained until the new country is permanently abandoned, but unless another one is acquired immediately, your UK domicile of origin will revert automatically – even if you never set foot in the UK again.

Mixed domiciled couples must be careful. Normally assets passing between spouses are IHT exempt, but assets passing from a UK- domicile to a non-UK domiciled spouse are only exempt up to £325,000 unless they elect to be treated as UK domiciled for IHT purposes. This has a knock-on effect on their subsequent death. Usually, any challenge will come after your death, and it is up to your personal representatives to prove your intentions in life and gather evidence – which may not be possible, so you must ensure your record-keeping and evidence is strong.

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Are You British, And Have You Recently Become An Official Resident Of Spain?

By Jeremy Ferguson
This article is published on: 9th April 2019

09.04.19

If The Answer is Yes,
What’s Going to Change For You?

Last night I attended a presentation hosted by the British Consulate covering the issues of living here post Brexit. Well, I am not sure how informative it was, as there seemed to be lots of ifs, buts and maybes. One thing I did conclude from it all however, and something I have always maintained, is if you live here, why not just get in to the system properly rather than constantly ‘wondering’ about it, or simply avoiding the issue.

Many people have been here in Spain for years without ever becoming officially resident. Differing circumstances cause this, varying between lots of time spent travelling, working away in another country or just being told not to worry. These tend to have all created a ‘meaning to get round to it tomorrow’ situation for many people.

This has quite often been the case when I have met with people during the 20 plus years I have been here, until along came this Brexit situation. It has resulted in more and more talk about what to do in the press, on the TV and radio, in bars, at family gatherings; basically everywhere.

EU membership has led to the feeling of it being very easy to live here in oblivion to all things official. But that looks like it is now changing. Or is it? One thing we do know is that the Spanish have seized the opportunity to entice people to become official residents of Spain, and if you want to avoid any doubt going forward, it is by far the most sensible option.

In the build up to the 29th of March deadline, the British Consulate and local Spanish town halls have actively encouraged people here to take up official residency in a series of talks like the one I attended last night. It’s amazing how quickly this has all become reality in what seems such a short time since the original referendum in June 2016. Now we are looking down the barrel of a possible no deal Brexit on the 12th of April.

Or are we? Who knows as I write this.

All of this aside, the sensible thing, without doubt, is for people to become officially resident here in Spain. For many, since the Brexit situation it has felt like a fait accompli and therefore something they simply have to do. Whatever the reason, if you have made the decision, then what does it actually mean for you going forward? Things seemed to be absolutely fine before, so surely not a lot will change?
Well, that is not exactly true.

The first thing to stress is how nice it is to know that now you won’t need to worry about ‘sort of knowing’ you probably should be resident and in the system. Things can certainly now be 100% clear. I call it ‘the sleep easy factor’, and it’s amazing the amount of people who say how good they feel when it’s all done.

There are a number of things that you should now consider, not necessarily in this order.

Do you have Spanish will?
You should already have a Spanish will if you own a property here, so that’s not changed. If you haven’t done that, you must, and it is very easy to do. It can be in both English and Spanish so you will understand everything.

And it’s not expensive. A lot of lawyers I know will do it for a couple of hundred euros if things are all quite straightforward. That will be another box ticked!

Once resident, currently some say you have up to two years to change your driving license to a Spanish license. There are others who say you have three months, others who say 9 months. The UK Government advice site says two years.

Regardless of who says what, and to avoid any embarrassing confusion, once you have residency why not just get on with changing your license? Again, there are many people around who will help you do this. You will get a temporary license while it is being dealt with and then a nice new Spanish license. A medical test will be needed, but again these aren’t that difficult to arrange. As long as you are in reasonably good health this shouldn’t be an issue.

On a positive note I have certainly found Trafico much easier to deal with showing a Spanish license when pulled over for a roadside check. The rules here are different to what you may be used to. You start with 13 points and they are deducted when you are caught being naughty. When you get to zero, then a suspension will occur!

Importantly, there will be taxes and tax returns to consider.

If this is your first time becoming a tax resident, then you will have to file a tax return for this year. The tax year here is the same as the calendar year (unlike the UK with their silly April date!). Your first return will therefore have to to be filed no later than the 30th June 2020.

Income tax will be due on income received during the year at varying rates depending on the amounts involved. This is similar to the UK with the rate increasing the greater your income level.
If you were previously a non resident, then you would pay capital gains tax when you sold your house (assuming there was a profit!). Now, as a resident, this will not apply on your main residence when it is sold, subject to certain criteria being met.
Wealth tax is due every year on your assets. This, as the words say, is effectively for people considered wealthy, and increases the wealthier you are. For most people this is not too much of an issue, but can be painful for people with a lot of assets.
Inheritance tax can be a complex area, and tax is paid by the person who receives the inheritance. The rules here in Andalucia have changed recently, meaning this should really not be so much of an issue anymore as there are now large exemptions granted which almost eradicate any amounts due, depending on the size of the estate.
At the end of each year, you will now also have to file a separate tax return from the one mentioned above, on a form known as Modelo 720. This is simply a declaration of everything you own in excess of 50k € outside of Spain (bank accounts, property, investment policies, share portfolios etc), and needs to be filed by the 31st March 2020.

Investments & Pensions
Regarding your investments and pensions, take a good look at where your income is coming from and what type of investments you hold. A simple example of the different treatment after taking residency would be holding UK ISAs. Although these are tax exempt in the UK, as a tax resident here these will now be taxable.

Also, how will your pension be taxed now? Previously, you were entitled to a Pension Commencement Lump Sum (PCLS, previously referred to a tax free lump sum). This will now be taxable here in Spain. The rate applicable will vary depending on how old the scheme is, and any benefits you are receiving will be taxed differently depending on the amount. If you haven’t started drawing from your pension yet, it may be worth looking at moving the scheme away from the UK, for a multitude of reasons. On the other hand it may not, so if you do look into this, make sure you are furnished with all of the information you need to make a well informed decision.

Having taken residency will mean you have adequate medical insurance in place, and although this can be seen as expensive, the treatment you will receive will be second to none.
Of course, as with all of these things there are the exceptions and everyone’s circumstances differ slightly. But the overriding message is that things should be fine here, even after Brexit, and as we know, the Spanish are very keen to keep us all here for many years to come.

I have covered many different aspects in this article, but please make sure you take good advice from people in the know. There are many legal, tax and financial advisers here who will be able to help you with most of the subjects covered; but as always, make sure you shop around, as prices and service levels do vary greatly, and always see if you can get a recommendation from someone who has firsthand experience of using that person before.

So, with all things considered, maybe Brexit pushing you to become a fully fledged Resident of Spain wasn’t such a bad thing after all.

Where are you domiciled?

By Gareth Horsfall
This article is published on: 1st November 2017

01.11.17

As a foreign national living in Italy for many years I find it sometimes confusing to look at where you come from and know where you belong. I rang my prefettura the other day to check on the progress of my Italian cittadinanza application only to be told that I would have to keep checking the Ministero del Interno website to see whether any updates or further requests for information would be required and that no confirmation email would be sent.

Anyway, this got me thinking about the issue of ‘where we belong’ and ‘where we think we belong’. The difference being, one is based on facts and one is based on what we believe to be true.

If I take a cross section of you, my group of clients, and stranieri living in Italy, I could split you into many different groups (it is not an exhaustive list), but a good summary would be as follows:

Foreign nationals married to Italians (like myself)
Foreign nationals who are married/partners with someone of their same nationality
Foreign nationals married/partner with someone of a different nationality
Foreign nationals who are not married

And within this group I could create sub groups of you:

those who don’t intend on returning to your country of origin
those who have made a long term move to Italy but intend on moving away from Italy at some point in the future, mainly for reasons of later retirement when language, health, and maybe grandparenting considerations become more of an issue

However, in each category and sub category we have to work with the fact that we have accumulated financial assets which, from a fiscal point of view, will be subject to taxation in any one country or another. Knowing which group and sub group you belong to, and the definition of such, will likely determine which jurisdiction you are considered for inheritance tax/ succession purposes.

So let’s focus on the subject of domicile for a moment, since the application of domicile will determine which tax authority will have overriding power when it comes to your inheritance tax or successione. Firstly I want to highlight the definition of domicile in the UK (which may also be applied in other similar countries which work on a basis of common law)

Definition of domicile
The domicile is the country which a person officially has as their permanent home, or has a substantial connection with. When you’re born, you’re automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother, although this may vary depending on each individual’s circumstances.

Your domicile of origin then continues until you acquire a new domicile – even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.

Now let’s look at the definition of domicile in Italian law, which has a totally different meaning:

The place of domicile is taken to be an individual’s principal place of business and interests.

(see full definition of residency and domicile in Italy HERE)

As you can see the two definitions have quite a different meaning. This creates problems when looking at inheritance tax, succession planning and will writing.

CAN I BREAK DOMICILE OF ORIGIN?
For those of you who fit into the category of having lived in Italy for many years and have few or no connections back in your country of origin, it might be that you are now in the position that you could break the domicile of origin and be subject to the law of Italy on your worldwide estate. This might have some advantages given that succession taxes in Italy are very low compared to other European countries.

However, to break the domicile of origin rule, specifically when relating to UK citizens, you would have to:

show that you were not domiciled in the UK within the three years before death
show that you were not resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you died

CHANGING YOUR DOMICILE
You might also try and actively change your domicile but to do this you will need to satisfy a number of criteria and be able to provide evidence of each one. The basic criteria for changing your domicile will typically include as an absolute minimum:

* Leaving the country in which you are domiciled and settle in another country
* Provide strong evidence that you intend to live in your new location permanently or indefinitely.

However, the criteria for changing your domicile are incredibly varied and include things like closing bank accounts down in your country of origin, selling all properties that you may own there and finally each case will be judged on it’s merit incorporating the evidence provided.

SO WHAT IS THE SOLUTION IN ITALY?
The long and short of this is that when you die, it is highly likely that as a foreign national living in Italy, that unless you have attained cittadinanza, the Italian authorities will refer back to your country of origin and allow that authority to apply their inheritance tax code to your worldwide assets. (Any Italian taxes would still need to be applied, where appropriate to Italian domestic assets, such as property) Whilst this might be preferable for some, you may wish the Italian tax code to apply on death because of its lower tax rates. If this is the case then you have to try and break domicile and this can only be determined at the point of death by the relevant tax authorities. If you want to know how hard that could be then see the ”famous example’ in the column opposite.

Clearly it makes sense to start planning to minimise problems from an inheritance tax point of view, as soon as possible. Having a will in place is the first step to ensuring that your relatives are not left with cross border legal burden when the inevitable happens.

Do you know the rules around domicility?

By Derek Winsland
This article is published on: 1st September 2017

01.09.17

Like many in France, I took time off this month, and to while away the time, caught up on some industry articles. One such article was written by Old Mutual International that presented the results of a small survey it can conducted amongst ex-pats regarding what they believed were the rules around domicility.

It asked the respondents six questions, and the answers were sufficiently enlightening that I thought I’d share them with you.

1. British expats mistakenly believe they are no longer UK domiciled
Everyone has a domicile of origin, acquired at birth. For UK nationals, it’s possible to acquire a new domicile (a domicile of choice) by settling in a new country with the intention of living there permanently. However, it is not always guaranteed that one can lose one’s UK domiciled status and acquire a new one, as there are no fixed rules (as you would expect from HMRC) as to what is required.

Living in another country for a long time, although an important factor does not prove a new domicile has been acquired. Among the many conditions that HMRC list, it states that all links with the UK must be severed and they must have no intention of returning to the UK.

Research* shows 74% of UK expats who consider themselves no longer UK domiciled still hold assets in the UK, and 81% have not ruled out returning to the UK in the future. This means HMRC is likely to still consider them to be deemed UK domiciled.

2. British expats mistakenly believe they are only liable to UK inheritance tax (IHT) on their UK assets
As most British expats will still be deemed UK domiciled on death, it is important to understand that their worldwide assets will become subject to UK IHT. A common misconception is that just UK assets are caught. This lack of knowledge could have a profound impact on beneficiaries.

Before probate can be granted, the probate fee and any inheritance tax due on an estate must be paid. With UK IHT currently set at 40%, there could be a significant bill for beneficiaries to pay before they can access their inheritance. Setting up a life insurance policy could help ensure beneficiaries have access to cash to pay the required fees. Advisers setting up policies specifically for this purpose must ensure they place the policy in trust to enable funds to be paid out instantly without the need for probate.

Research* shows a staggering 82% of UK expats do not realise that both their UK and world-wide assets could be subject to UK IHT.

3. British expats mistakenly believe they are no longer subject to UK taxes when they leave the UK
All income and gains generated from UK assets or property continue to be subject to UK taxes. Some expats seem to think that just because they no longer live in the UK they don’t need to declare their income or capital gains from savings and investments or property held in the UK. By not declaring the correct taxes people can find they end up being investigated by HMRC, and the sanctions for non-disclosure are getting tougher.

Research* shows 11% of UK expats with UK property did not know that UK income tax may need to be paid if their property is rented out, and 27% were unaware that Capital Gains Tax may need to be paid if the property is sold.

4. British expats mistakenly believe that their spouse can sign documents on their behalf should anything happen to them
The misconception that a spouse or child or a professional will be able to manage their affairs should they become mentally incapacitated is leading people to think they don’t need a Power of Attorney (POA) in place. This could result in families being left in a vulnerable position as their loved ones will not automatically be able to step in and act on their behalf. Instead, there will be a delay whilst they apply to the Court of Protection to obtain the necessary authority. This extra complication is all avoidable by completing a lasting POA form and registering it with the Court of Protection.

Research* shows 44% of UK expats wrongly believe their spouse will be able to sign on their behalf should they become mentally incapacitated.

5. British expats unsure if their will is automatically recognised in the country they have moved to
It is wrong to assume a will or POA document is automatically recognised in the country in which they move to. Often overseas law is driven by where the person is habitually resident, and the laws of that country will apply. Therefore, people may require a UK will and POA for their UK assets and a separate one covering their assets in the country they live. The wills also need to acknowledge each other so as not to supersede each other.

Research* shows 50% of UK expats do not know if a will or POA is legally recognised in the country they have moved to.

If you feel you could be affected by this, or have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

Le Tour de Finance, Domaine Gayda, 6th October 2017

This year’s event is now fully subscribed and we are unable to accept any more places. If you were wanting to attend, but hadn’t got round to booking, then all is not lost. It’s possible to make a personal appointment to see me in our Limoux office. Please ring either the office or me directly on my mobile.

All about residence……..

By Gareth Horsfall
This article is published on: 17th March 2015

17.03.15

What are the issues facing some of you? One which raises its head periodically is the question of residency and tax residency in Italy.

Before I go into this I would like to look back for a moment at some very recent Italian past and reflect on why we are where we are today.

2012 was a turning point in Italian politics and the way that, we, as expats live and could continue to live in Italy. It was the start of the New Norm. (as I like to call it)

It started with the moment when Berlusconi was ousted as Premier and was swiflty followed by the non elected Mario Monti. What was once accepted as the norm suddenly went under the spotlight. This was seen most dramatically in new tax legislation imposed on domestic and foreign assets and incomes and the sudden drive to track down and prosecute tax offenders.

There was no longer the option to live between 2 residency’s, but the subject became much more matter of fact (see rules below for details). Taking residency, by definition, means you are subject to Italian tax law.

The law is clear, as follows:

An individual is considered resident for tax purposes if, for most of the calendar year (i.e. 183 days) is:
registered with the Registry of the Resident Population (Anagrafe)
or has his/her residence or his/her domicile in the territory of the Italian state, as defined by Section 43 of the Italian Civil code

According to Section 43 of the Italian Civil Code:

The place of residence is taken to be the place where the individual has habitual abode
The place of domicile is taken to be individual’s principal place of business and interests

In fact, residency has never been a choice. It has always been a matter of fact and a tax agency would always see it that way. If you spend the majority of time in Italy then you will be deemed tax resident as defined by the rules above.

The key as always is in the planning.
If you are a holiday home owner then you should rarely take residency if your clear intention is to maintain your principal residence elsewhere.

But if you want to enjoy Italy all year round and pay the lower rate of VAT on a property purchase, benefit from the good health care system, be able to buy a car here (non residents cannot purchase a car legally in Italy), and benefit from lower utility rates then residence is required and certain legal obligations apply.

As I always say, you will pay more tax by living in Italy versus other Northern European countries and the USA. How can we expect to pay the same for sunshine? !! But a rural life, for example, should see your costs fall.

Despite all this, and having lived in Italy for years, I can tell you that there are tax-reduction and financial planning strategies that can lighten the burden somewhat. I should know! I have fallen for every tax trap in the book and have had to pay the tax man for it. But failure to plan effectively in Italy, ultimately, sharpens the senses.

If you would like to contact me with a view to finding out more then feel free to do so so. We don’t charge fees at The Spectrum IFA group so you can feel secure that you won’t be out of pocket by seeking a little advice.