"The latest numbers from HMRC show people are passing on more and more to the taxman rather than their loved ones." - The Daily Mail.
UK expats who have lived abroad for many years often remain UK-domiciled and therefore liable to UK Inheritance Tax (IHT). The rate of this tax might be considered penal. It is currently 40% on the total value of the estate of a deceased after the exemptions. It is an additional tax payable on capital accumulated during lifetime upon which tax has already been paid.
Many UK nationals who have lived long term in Cyprus may assume their liabilities to UK tax have ended. Probably they are no longer liable to UK income and capital gains tax - but they may well remain liable to UK IHT!
It is difficult to change your domicile, so the default position is that those who acquired a UK domicile of origin at birth - 99% of all UK nationals born in the UK - will keep that UK domicile for their entire lives, and with it their liability to UK IHT.
It is however possible to acquire a new domicile of choice and it is hugely advantageous to do so. Any long-term Cyprus residents can potentially lose their UK domicile and acquire a new domicile of choice in Cyprus. That is the only way they lose their liability to UK IHT. In theory they would of course pick up a liability to Cyprus estate taxes but in practice Cyprus doesn't have any, so there is no downside to acquiring a domicile of choice in Cyprus.
Legally, the test is simple and there is only one. Has the taxpayer formed the intent to remain in Cyprus indefinitely? If the answer is 'yes', that person is now domiciled in Cyprus. All the facts and circumstances are evidential but none of them are definitive apart from this test of 'intent'. But convincing the UK tax authority (HMRC) of that is not so simple.
If the evidence to support the claim of a new domicile of choice is not accumulated and documented during the lifetime of the taxpayer, it is going to be very difficult for their executors to convince HMRC that there has been a change of domicile. So, it is vital that steps are taken during the taxpayer's lifetime to properly document their intentions and obtain opinion from UK counsel that a new domicile has been acquired. That opinion will rarely be challenged unless the facts and circumstances change. It is the Holy Grail and will give you the best possible protection.
All of a person's facts and circumstances are relevant, but none are definitive. Generally, it will be impossible for HMRC to agree that a new domicile has been acquired for the first six or seven years of a taxpayer living abroad but thereafter, as long as the facts and circumstances corroborate that statement of intent, there is a good chance that a new Cyprus domicile is or can be acquired.
For this to happen it is necessary to show permanence in Cyprus through such things as acquiring property and establishing social and economic ties with Cyprus. Losing such ties with the UK is also extremely helpful but it is not essential. For instance, having a UK property is by no means fatal to any claim that the UK domicile has been lost; it is necessary only to show that the taxpayer has greater connections with Cyprus than he or she has retained with the UK. But still it is the main test of intent that is the definitive one.
Coincidentally, one of the leading cases on domicile involves a Cypriot man, the late Andreas Nathanael, who died suddenly in London in 2003. In Cyganik v Agulian, the Court of Appeal held that the deceased had retained his foreign domicile of origin in Cyprus despite being habitually resident in the UK for 43 years before his death. His retention of strong ties with his country of origin carried weight with the court. These ties included the ownership of two flats in Cyprus, close family members in Cyprus (daughter and granddaughter), lengthy return trips to Cyprus, a Cyprus identity card providing him with local rights, and documented attempts to purchase a home and a hotel in Cyprus.
It is easy to see - and logical - that the reverse should also be true. A UK national spending 40 years in Cyprus may not necessarily lose his or her UK domicile and might fail to acquire a new domicile in Cyprus.
Other leading cases are Gains-Cooper and Barlow Clowes International Ltd & Ors v Henwood. Both those cases involved UK nationals who had spent long periods of time abroad but had retained UK connections and failed to establish sufficient connections abroad in one place to convince HMRC that they had truly lost their UK domicile. And in both cases, this failure had severe tax consequences.
UK IHT is obviously only payable after death, so while the taxpayer may not suffer their surviving family members certainly will. Most (if not all) taxpayers would much sooner that their hard-earned assets went to their families rather than to HMRC.
We strongly recommend that anyone who has any doubt about their domicile should seek expert advice at the soonest opportunity. IHT can be planned out relatively easily - but the key to any planning is to first get certainty on domicile. There is never a convenient time to start this process and clearly many people never get round to it. The results are obvious from the headline at the start of this article. The message is: 'Get on with it or lose it.'
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.