Domicile, Residence and Probate

Many expats have conflicting views of the difference between domicile and residence. Some think they are easily interchangeable, not realising the impact this may have when they die. The vast majority do not understand that probate will have a significant effect on the administration of their estate. Whether you like it or not, your domicile and the probate process are closely tied together.

There is actually a difference between your country of domicile and that of your residence. Many expats go through life assuming that they are domiciled in the place where they live. This is not necessarily the case. You may have chosen an alternative domicile to that of your country of origin. However, if you have not properly established this in that country, your heirs may have a rude awakening when you are no longer around to state your case.

The legal dictionary definition of domicile is: “the place where an individual has a fixed and permanent home for legal purposes; called also legal residence.” So it follows logically that wherever you live becomes your domicile. But your domicile is actually set when you are born and follows that of your father. Domicile legally designates the country of law for the purposes of determining legal issues such as the ability to invoke the jurisdiction of a court in respect of you as an individual.

There is a distinct difference in the legal dictionary definition of residence as opposed to domicile. Of residence, it says: “the place where one actually lives as distinguished from a domicile.” So, there is a recognised legal distinction.

Whilst you are resident outside your country of origin you are usually tax exempt on income or capital gains generated outside that country. However, when you die, inheritance tax (IHT) is often assessable on your estate’s worldwide assets in your country of domicile.

Readers have asked how their country of domicile tax authority would have knowledge of their assets abroad. Would these not be under the radar? There are a number of ways in which different authorities uncover the realities of your estate.

This is where probate becomes relevant. Often misunderstood, a grant of probate is actually an authority, given to the executors of your estate, to deal with your assets and other requests made in accordance with your Will. A grant of probate needs to be obtained for each country where there are assets belonging to your estate. When a grant of probate is requested in any other country, they usually request a copy of the probate issued in your country of domicile. In this way, the authorities in your country of origin will uncover details of your estate elsewhere and ensure that the tax authority is advised so that IHT can be dealt with.

Whilst this, to some extent, is a grey area, there are certainly facets which can be overcome and if you are not entirely honest you may get away with evading IHT. However, this will be illegal and you could leave your grieving heirs with more problems than they had envisaged or been prepared for.

The USA is complex. IHT regulations and the situation depend on your history. For the majority of domiciled US citizens the threshold is quite high and the rates of tax are relatively low. Be warned if you have ever been resident in the USA and have assets there, as a non-resident and non-domiciled person, tax starts on almost the first dollar and can be significant.

Australia does not levy IHT so this is not such a significant factor if you are domiciled there. In other European countries the laws vary from place to place. In The Netherlands, for example, IHT is not high. However, once you have been resident outside Holland for at least ten continuous years you are considered non-domiciled for IHT purposes. In Italy there are gift taxes which start at low levels but at very low rates, making tax levels for domiciled individual estates rather more palatable.

Canada is more complex because it taxes individuals at death rather than the estate after death. Therefore your domicile is not as relevant. It is more a question of your resident status at death and the nature of the assets making up the estate.

Thailand is now considering the implementation of IHT. How this will be administered and whom it will affect remains to be seen. If expats are affected there may well be a reduction in the number who decide to remain here for the rest of their lives.

The UK expat’s estate is usually burdened with a relatively high level of IHT. Tax is payable on the entire value of the worldwide estate. There is a nil rate band, meaning that tax is levied at 0% on the first £325,000. However, all asset values above that are taxed at a flat rate of 40%.

If you consider the fact that IHT will be assessable on your worldwide assets at death, it often comes as quite a shock to many British expats that they will leave a great deal less to their heirs than they had envisaged. Do note that any assets within the UK will actually be assessable whether you are domiciled there or not.

As discussed last week, this is a complex matter requiring careful planning and action to ensure you do the right thing. Many readers are under a complete illusion when they believe they are automatically non-domiciled. They simply bury their head in the sand and hope that things will change over time.

If you seriously wish to do something about this, your first stop should be with me. I can help you assess your situation and talk you through the pitfalls along the way. I will oversee your entire situation and give you appropriate advice about a succession plan, IHT planning, trusts, wealth management, investments, pensions, insurance and any other matter relating to the business of living life.

 

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 32 years and is Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers on request

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