Questions over an individual’s domicile status as a matter of general law are important for UK tax purposes. A person’s deemed domicile is also relevant for most UK tax purposes (including, inheritance tax, capital gains tax and income tax).
Domicile enquiries are serious matters where advice should be taken. Here I hope to answer some basic questions about a person’s domicile. Please see my blog posts for some further domicile updates / recent case law in the area.
What does “Domicile” mean?
As a matter of general law, an individual’s domicile is most akin to that person’s permanent home. For UK tax purposes, it further includes a person’s deemed domicile.
A person may be deemed domiciled if they have been UK tax resident for 15 or 17 of the last 20 tax years or if they were born in the UK with a UK domicile of origin and are resident in the UK.
What is the Difference Between Domicile and Residence?
As a matter of UK tax law, whether or not an individual is taxable and to what extent is established by that person’s domicile and residence. To be able to fill out your UK tax return, it will be necessary to know both your domicile and residence.
UK tax residence is established through applying the statutory residence test found in schedule 45 of Finance Act 2013. It is tested on an annual basis and ultimately is purely objective. The key taxes which are affected by a person’s residence are: income tax and capital gains tax.
Domicile, as noted above, looks more long term at the taxpayer’s ultimate intentions. A person is born with a domicile of origin which will be, in the case where an individual is born with two married parents, their father’s domicile at the time of their birth. In other cases, the rules as a matter of UK law can be more complicated.
A person may acquire a domicile of choice if they are both resident in a place and form an intention to reside there permanently.
A person may also be deemed domiciled in the UK in the following circumstances:
- they have an actual domicile in a different country but have been UK tax resident for a significant amount of time;
- they had a UK domicile but have acquired a new domicile for three years.
- they are a formerly domiciled resident being someone who was born in the UK with a UK domicile of origin and are UK resident.
What is the impact of my domicile on taxation?
Being non-UK domiciled whilst UK resident can have some significant advantages for UK tax purposes.
Where an individual is UK domiciled and resident, they are liable to UK income tax on their worldwide income and gains on the arising basis. This will include their overseas income. For UK inheritance tax purposes, they will be liable to inheritance tax on their worldwide assets.
This can be contrasted with the position where a person is UK resident but non UK domiciled. If an individual is non UK domiciled (and not within the relatively new deemed domicile rules) then they are instead taxed on the remittance basis. This means that they will only be required to pay tax on those income and gains which they remit to the UK.
Further to this, a person is in a significantly better position for inheritance tax purposes as instead of their worldwide assets being subject to UK inheritance tax, it is only those assets situate in the UK which will be subject to it. This provides significant planning opportunities for those individuals with a non UK domicile.
How to determine and defend domicile?
A key question which I have had from clients regularly is what is my domicile position and what evidence do I need to be able to prove my non dom status.
These questions will usually arise in the following circumstances:
- where an individual has moved outside the UK and has become a permanent resident in a new country and wants to know if they may argue that they have acquired a domicile of choice in that new location or if they are still deemed domiciled in the UK;
- where an individual is UK tax resident but non UK domiciled and wants to establish whether their claim to non dom status would hold up in the event of an HMRC enquiry.
It is helpful to consider these two sets of circumstances in more detail.
How can I obtain a domicile outside of the UK?
As stated above, in order to obtain a domicile of choice, it is necessary for the following two conditions to be met:
- You must be resident in the new location where you intend to obtain the domicile of choice; and
- You must intend to reside there permanently.
For the first requirement, residence requires more than physical presence in a country but not much more. It suggests becoming an inhabitant (as opposed to passing through).
Intention, however, is a more difficult requirement to meet. Not only must you have an intention to live in the location permanently, this intention must be corroborated through the actions you take. This can be corroborated through taking some of the following steps:
- living in the new location for an extended period;
- moving your family to the new location with you;
- selling or moving all of your UK based assets;
- purchasing land in the new location;
- getting fully involved in the new location including voting, joining clubs or societies, making many friends, etc
- transferring personal admin type things to the new country, for example your driver’s license, your doctor, etc
- seeking to acquire permanent residence status in the new country.
These are just a few of the steps that an individual can take to outwardly demonstrate an intention to reside permanently in a new place. I would suggest that anyone seek advice prior to taking any steps which rely on a non UK domicile. This is especially the case if you have only been non UK resident for a short period of time.
How can I maintain a foreign domicile status for UK tax purposes whilst UK resident?
There are circumstances where an individual with a foreign domicile of origin or choice moves to the UK but only plans to stay there for a short period of time or even for a somewhat extended period but do not plan on making the UK their permanent residence. In such a situation, that person will want to know what steps they can take to ensure that they maintain a foreign domicile.
The key here will be ensuring that the individual can corroborate, with objective evidence, their intention not to remain in the UK permanently.
The best advice in these circumstances is to maintain as many ties as possible with the original country as possible. More recently, the UK courts have shown a focus on the ties an individual has with their country of origin.