ALL YOU EVER WANTED TO KNOW ABOUT DOMICILE (AND WHY YOU WANT TO KNOW IT)
7 December 2018
A person who is UK domiciled (whether resident here or not) is subject to inheritance tax on their worldwide assets.
How domicile affects your tax position and how you can change it
How does domicile affect my tax position?
A person who is UK domiciled (whether resident here or not) is subject to inheritance tax on their worldwide assets.
If you are UK domiciled, domicile does not affect your income or capital gains tax position (although residence does).
People who are UK resident but non-UK domiciled have a privileged tax status:
- Non-UK assets are outside the UK inheritance tax net.
- Non-UK income and non-UK gains are eligible to be taxed on the “remittance basis.”
- This means that a resident non-domiciliary, (“non-dom”) is not subject to UK tax on non-UK income and gains unless and until those funds are “remitted” to the UK – essentially brought to the UK directly or indirectly.
- A resident non-dom remains taxable on UK income and gains and is subject to inheritance tax on their UK assets.
- A trust established by a resident non-dom (or a non-resident non-dom) has privileged status in that:
- It is free of inheritance tax on non-UK assets, as long as the trust lasts.
- Non-UK income and gains (whether on UK or non-UK assets) arising within the trust are not subject to UK tax unless and until the trustees make distributions to UK resident beneficiaries. Special capital gains tax rules apply to UK real estate.
What is domicile?
Domicile is, broadly, the place you regard as your permanent home. This is overlaid with technical rules.
Domicile is a specific UK law concept which is different from US domicile or “domicil” in some European countries.
Your domicile affects your legal status, for example, your ability to make gifts and the law which applies to inheritances.
Domicile, along with residence, is also crucial in working out your UK tax liability. Special, beneficial, rules apply to those who are not domiciled in the UK.
Everybody must have a domicile at all times and you can only have one domicile at a time (unlike residence where you may be resident in more than one country).
Domicile is associated with a particular system of law so, although, for convenience, we talk about “UK domicile” or “US domicile” you would be domiciled in England and Wales or Scotland or the State of New York, or the State of California.
If you come from or move to another country with a federal system e.g. Canada or Australia or Switzerland, your domicile would be linked to a specific Province or State or Canton.
Domicile of origin
Your “domicile of origin” is the domicile of your father at the time you were born, assuming your parents were married. If they were not married, your domicile of origin will be that of your mother.
Your father’s or mother’s domicile has to be determined according to the rules set out below. Domicile is nothing to do with nationality and the place of birth does not matter (but see below in relation to “deemed domicile”).
Domicile of dependency
Whilst a child is under the age of 16, his or her domicile will change with that of his father (or mother if appropriate).
A child becomes capable of choosing a new domicile (a “domicile of choice”) from the age of 16 but, unless and until that happens, his last domicile of dependence will continue.
If you are a woman who married before 1 January 1974, you would automatically have acquired your husband’s domicile as a domicile of dependency.
Changing your domicile: domicile of choice
You can acquire a new domicile by actually living in the new country with the intention that it will be your permanent or indefinite home. In other words, you must settle in the new country.
It is not easy to change domicile. Although domicile is stated to be a matter of intention, that intention has to be supported by all the facts and circumstances of your particular case. No one factor is conclusive one way or another. It is the accumulation of all the details which paints a picture of the place where you “really” belong.
So for example, if you are a UK domiciliary who wants to become domiciled elsewhere:
- You can retain British Citizenship.
- You can retain a residence in the UK – but this should be modest compared with your home in the new country.
- You can retain investments in the UK, especially if they are illiquid, although there may be tax consequences and you might wish to sell them in any event.
- You can retain your UK lawyers and accountants to advise on UK matters.
It is important that you establish roots in the new country and, so far as possible, you minimise your connections with the UK.
If you are a non-UK domiciliary who has been living in the UK for a long time:
- You can acquire British citizenship.
- You can have a substantial residence in the UK – but it is helpful if you have a residence in your country of domicile.
- You can make investments in the UK (although you would normally avoid this for tax reasons).
- You can use UK advisors for your UK affairs.
In this case, it is important that you maintain as many links as possible with your domicile and/or other countries to demonstrate that you have not decided to settle permanently in the UK.
It is also very important that you have in mind a fairly specific event or time which will trigger your leaving the UK. This could be:
- When your children complete their education.
- When you retire.
- When the political regime in your home country changes.
Some of the factors which HMRC will consider when they examine a person’s domicile are set out below. If you were a UK domiciliary and you say that you are now domiciled elsewhere, you will need to be able to demonstrate as many of these connections with your new country as possible and as few as possible with the UK. Clearly, there is not much you can do about the location of your wider family! But, you should take yourself off the electoral register and you should not vote in the UK.
If you are a non-domiciled individual who is a long term resident in the UK, you will need to maintain your links with your home country and avoid links with the UK where possible. For example, you need not necessarily have your investments managed in your home country but you should have them managed outside the UK. You should vote in your country of domicile if you are eligible to do so and should not vote in the UK.
Non-exhaustive list of factors
- Do you have a home in the country of domicile and how does it compare in size and value with other homes you might have?
- Where do most of your family live?
- If you are a UK resident non-dom, how often do you visit the country of your domicile and for what purposes?
- If you were a UK domiciliary who has now emigrated, how much time do you continue to spend in the UK and for what purposes?
- Where are your business interests, if any?
- Where are your investments located and managed and what currency are they in?
- What social connections do you have in your country of domicile/have you retained in the UK?
- Where do you keep your most precious personal items and important papers, e.g. will/insurance policies/birth certificates etc.?
- Do you speak the local language of your country of domicile? If not, are you having lessons?
- Where have you made your will or wills?
- What nationalities do you hold?
- If you have business interests including shares in family companies, where is the business located? Are you just a shareholder? Do you do any work for them? If so, what work and where do you do it?
- Do you hold any directorships and in what countries are the relevant companies? Where are board meetings held?
- Are you involved in any clubs and societies/professional organisations/ religious organisations and if so, where and what is the extent of your involvement?
- Where do you vote?
There are many other things HMRC might take into account if they wanted to challenge your domicile. HMRC may seek to challenge your domicile if you are a non-domiciled individual who has been in the UK for a long time or if you started life as a UK domiciliary and you have emigrated abroad.
Below is a link to HMRC’s internal guidance which sets out some of the information and/or documents that they might want should they enquire into your domicile.
Abandoning a domicile of choice
You cannot abandon your domicile of origin. This is always there in the background.
You can abandon a domicile of choice by:
- Leaving the country of domicile.
- With the intention that it will no longer be your permanent home.
If you abandon a domicile of choice then one of two things will happen:
- If you immediately settle on a permanent basis in a new country you may acquire a new domicile of choice in that country.
- If you do not immediately acquire a new domicile of choice, your domicile of origin will “revive” i.e. you will be regarded as domiciled in the country of your domicile of origin even if you have never lived there and have no connections with it.
Deemed domicile is a concept which applies for tax purposes only. A person who is non-domiciled under general law may be “deemed domiciled” for tax purposes. A “deemed dom” person is treated as if they were in fact UK domiciled for tax purposes and will be subject to UK tax on their worldwide income, gains and assets.
Special rules apply to a trust set up by a non-dom (other than a returning UK domiciliary – see below) before he became deemed domiciled. Non-UK assets in a trust established before a non-dom became deemed domiciled remain protected so that there is no inheritance tax on the assets, and no income tax or capital gains tax liability, broadly, unless and until distributions are made to UK beneficiaries. UK capital gains generally are also protected (except gains on UK residential property, and from April 2019, UK commercial real estate and shares in UK property companies).
Emigrating UK domiciliary
In order to lose your domicile for tax purposes, there is a two-stage process:
- First, you must actually become domiciled in the new country. In theory, this can happen at the outset if you emigrate on a permanent basis and do not intend ever to return to the UK. You must intend to settle in the new country. An intention not to return to the UK but to stay in the new country for a set period and then move on will not be sufficient.
Unless you have had significant connections with the new country over a period of time, HMRC may be sceptical that you have settled permanently in the country immediately you arrive. Indeed, you may move on the basis that you will see how you like it before deciding whether to stay permanently.
At the point where you are living in the new country and have made that decision to stay permanently, your general law domicile will change.
- For inheritance tax purposes you will remain “deemed domiciled” for a further three years from the time you acquire a new domicile of choice. You should therefore be wary of carrying out tax planning in your new country within a short time of arriving there as this may have unintended UK tax consequences.
Non-domiciled UK resident
If you are living in the UK but are not actually domiciled in the UK you will become “deemed domiciled” for all tax purposes once you have been resident in the UK in at least 15 tax years out of the 20 tax years immediately before the year in question.
In practice, this means that if you come to the UK and live here you will become deemed domiciled at the beginning of your 16th tax year of residence. Note that if you leave the UK in year 15 you will still become deemed domiciled in year 16.
If you are a non-dom who has become deemed domiciled through long residence, you can only lose deemed domicile status by being non-resident for at least 6 tax years.
Once you become non-resident, you will no longer be liable for UK income tax and capital gains tax, (subject to some exceptions). If you remain non-resident for three years, you will no longer be treated as deemed domiciled for inheritance tax purposes. So if you leave the UK and stay outside the UK, you escape the UK inheritance tax net at the start of year four.
If you wish to return to the UK at some stage, you must remain non-resident for six tax years. If you return within this period, you will again become deemed domiciled on return.
If you remain non-resident for the full six year period and return to the UK after that, you will re-set your “domicile clock”. You will become deemed domiciled again if you remain resident in the UK for a further 15 years.
HMRC can always seek to argue that you have become actually UK domiciled for general law purposes at any time if the facts show that you have decided to settle in the UK permanently.
Returning UK domiciliaries
Special rules apply if:
- If you were born in the UK and
- you had a UK domicile of origin but
- you subsequently become domiciled in a country outside the UK; and
- you later (while remaining non-UK domiciled) become resident in the UK.
It does not matter whether you were taken to live abroad by your parents when you were young or if you emigrated as an adult.
If you satisfy all those conditions, you are regarded as a “returning UK domiciliary” and none of the beneficial rules which normally apply to non-doms apply to you whilst you are UK resident.
So if you become UK resident:
- You will immediately be subject to income tax and capital gains tax on your worldwide income and capital gains.
- If you set up a trust after becoming non-domiciled and you or your husband or wife can benefit from it, you will be subject to UK tax on all the trust’s income and capital gains.
- Inheritance tax consequences do not apply for the first tax year in which you are resident but will apply from the second tax year. From then on:
- In the event of your death whilst resident in the UK, your worldwide estate would be subject to inheritance tax.
- Any assets held in a trust which you created and from which you can benefit would be treated as if you still owned them and would be taxable on your death.
- Any trust you created would be subject to the normal trust charges even if the assets are non-UK assets. There would be inheritance tax charges at each tenth anniversary of the trust’s creation and if assets leave the trust. The maximum rate is 6% on each occasion.
Once you become non-resident again, your non-domiciled status is respected and you are taxed in the same was as any other non-resident non-domiciled individual would be.
These notes are a summary of the rules which do not cover all circumstances and do not constitute legal advice