Important Points for Residence Planning

The first step in optimizing your residence planning situation is to identify all the countries to which you are linked in some way. This process involves two key factors: the location and nature of your property and business assets and your place of residence.

A change of residence to a suitable country is an increasingly important aspect of international planning for private clients.

For some individuals and families, a change of residence is a highly sensible proposition. This is particularly the case for clients who live in countries with limited options for tax and estate planning, for those seeking more lifestyle choices, and for those who live in countries with an unstable political or economic climate, where an alternative residence is also a means to increase personal security and achieve a better quality of life, as well as offering the potential to acquire an additional citizenship.

Domicile and residence

Whereas residence simply means living in a place, domicile means living there with the intent to make it a fixed and permanent home. Legal domicile is an important concept because it often controls jurisdiction with respect to taxation, mainly with regard to inheritance taxes. Even after a client has become resident in another country for income tax purposes, they may still be considered domiciled in the previous country of residence for inheritance and gift tax purposes. This is particularly the case in countries such as the UK, which have a particular understanding of residence and domicile and rely on this concept to impose inheritance tax on their citizens even if they are no longer resident in the country.

Income tax based on residence

Most countries use residence as the key criterion for personal income taxation. Normally, various tests are applied to determine a person’s tax residence, for example physical presence, available accommodation, or center of vital interests. If an individual leaves a country and establishes bona fide residence in another country, the former is generally no longer able to tax the emigrant’s worldwide income

There is one important exception to the rule of taxation based on residence. Citizens of the USA pay taxes to the USA federal government regardless of their place of residence. Therefore, if USA citizens move their residence abroad, this does not terminate their USA tax liability. The only way for USA citizens to terminate their USA tax liability is to relinquish their citizenship.

Inheritance and estate planning

A change of residence usually also has a major impact on the situation regarding applicable inheritance laws and inheritance taxes. However, proper planning and advice is particularly important with regard to inheritance taxes, as the distinction between residence and domicile, and in some cases extended inheritance tax legislation, needs to be kept in mind. A client may well be tax resident in a jurisdiction that levies no inheritance tax, but upon their death, another country may claim that they were in fact still domiciled in that country and consequently subject their worldwide estate to inheritance taxes. 

Emigration and exit taxes

A growing number of countries have introduced specific measures to discourage the emigration of individuals through various forms of taxation. Such emigration taxes may have considerable implications for the tax aspects of a client’s relocation plans.

Health insurance

Health insurance is a small but important element in residence planning that is often overlooked by both clients and their advisers. When a person moves abroad, their current health insurance policy will in most cases not be continued, and they are usually left with a choice of finding another local insurer in the new country of residence or turning to an international health insurer. It is highly advisable to take out an appropriate health plan at a younger age before the first signs of ill health manifest. One of the first steps in a planned change of residence is to obtain worldwide health cover that will ensure the necessary international flexibility. A specialized Henley & Partners group company, Swiss Insurance Partners, provides the necessary advice and assistance in this area.

Business and family situation

It is essential that a client’s international residence planning follows their business and personal situation. It is crucial that a client should never be advised to relocate mainly for tax reasons as experience shows that they will very often act in a way that will sooner or later jeopardize the tax situation that led them to change their residence in the first place. There are many situations where a change of residence fits in well with a client’s business and family situation, and in these cases, a change of residence can also become an element of their legitimate tax and estate planning.