Following the changes to the UK deemed domicile provisions, which took effect from 6 April 2017, it is becoming increasingly important for individuals to make sure they are comfortable with the concept of domicile, that they understand how it is determined and, importantly, how domicile impacts their personal UK tax position.
Domicile is a concept of common law and is completely distinct from residence. An individual must have a domicile but can only have one country of domicile at a time, whereas it is perfectly possible to meet the requirements to be considered a resident of more than one country in a tax year or indeed a resident of no country.
Types of domicile
There are three distinct types of domicile recognised under UK law. Whilst an individual can only have one domicile, there are instances where this can change over time. There can be complexities in determining domicile, particularly where individuals move from their own country of birth and their children are subsequently born in another country where they may live for many years.
Domicile of Origin
This is acquired at birth and is that of the child’s father (where the parents were married), and of the child’s mother (where the parents were not).
Domicile of Dependency
The domicile of a minor child under 16 years of age follows that of their father (or mother as above). If their father’s domicile of origin is displaced with a domicile of choice (see below) before the child is 16, the child’s domicile changes to that of their father and remains so (unless that child acquires a domicile of choice elsewhere once they are an adult).
For example, a child is born to married parents where the father has a German domicile of origin. If his father moves to Canada before the child attains age 16, but returns to Germany within a few years, the child is likely to retain a German domicile. If his father remains in Canada, asserts a domicile of choice in Canada and never returns to Germany, the child has acquired a domicile of dependency in Canada and this replaces his German domicile of origin.
Domicile also impacts those women who married prior to 1 January 1974, in which case the wife acquired the domicile of her husband at the date of the marriage.
Domicile of Choice
Within their lifetime, an individual may actively choose to establish a domicile of choice in an alternative country, however it can be very difficult to lose a domicile of origin. Acquiring a domicile of choice relies in part on establishing residence in the chosen country, but it is more important to demonstrate over time the intention to remain there for an indefinite period, and by severing ties to the origin country.
For those individuals who have lived in the UK for many years, there is the argument that they have acquired a UK domicile of choice without expressly having the intention of doing so. This is of particular importance to those who, during that period have established strong links and significant family ties to the UK, having lost connection over time with the country where they had a domicile of origin.
The inadvertent acquisition of a UK domicile of choice is the likely argument put forward by HMRC when they make enquiries into an individual’s domicile.
Domicile and UK Taxation
Under UK domestic law, someone who was born in the UK will be domiciled in either England and Wales, Scotland or Northern Ireland. However, as each of these domicile states is viewed in the same way for UK tax purposes, we refer to those born in the UK as being ‘UK domiciled’. An individual who is UK domiciled and resident is taxed in the UK on their worldwide income and gains, known as the arising basis. Their worldwide assets are also subject to UK inheritance tax.
There are many individuals living in the UK who have a foreign domicile – referred to as ‘non-doms’. Non-dom status provides access to a potentially more favourable UK tax regime which can limit exposure to UK tax by providing the choice to use the remittance basis. It is for this reason that the UK tax authorities are increasingly looking to establish that those who claim to be non-UK domiciled are indeed so.
The April 2017 changes to the UK tax legislation introduced two further types of domicile. These do not displace either a domicile of origin, or a domicile of choice, but they do impact the exposure to UK taxation.
Deemed UK domicile
This applies to those who can demonstrate they are not UK domiciled, but who have been resident in the UK for 15 of the last 20 UK tax years. Use of the remittance basis is no longer available to these individuals. This means their worldwide income and gains are taxable on an arising basis and their worldwide estate is within the scope of inheritance tax. Breaking deemed domicile status requires leaving the UK for at least 6 complete tax years (income tax and capital gains tax) if someone is looking to return to the UK or for at least 3 complete tax years for inheritance tax purposes if someone is not.
Formerly domiciled resident
Those who have a UK domicile of origin, but who have subsequently left the UK to settle in another country will be treated as temporarily reviving their UK domicile of origin for UK tax purposes if they become UK resident again after 5 April 2017 until such time as they leave the UK again. UK domicile of origin is revived immediately for income and gains purposes and from the start of the second tax year of residence for inheritance tax purposes.
It is extremely important that the concept of domicile is fully understood by those who make a claim to be domiciled outside the UK and who file their UK tax returns on that basis.
Non-dom status is usually advantageous from a UK tax perspective and consequently, we are seeing an increasing number of enquiries by HMRC into income tax returns, or inheritance tax returns which include a non-UK domicile claim. This is of particular relevance to those who have been resident in the UK for a significant number of years, or who are of an age where it appears unlikely that they will ultimately return to the country in which they claim to be domiciled.
Under the April 2017 legislation changes, there are options for some non-doms to benefit from the rebasing and cleansing reliefs as well as the trust protections for those who settled trusts prior to becoming deemed UK domiciled.
These reliefs are potentially extremely valuable and whilst the mixed fund cleansing opportunity ends in April 2019, in the case of rebasing it may be many years before an asset is sold. At the date of sale the individual will need to continue to be non- UK domiciled in order to benefit. A successful challenge by HMRC to the domicile of an individual who has claimed either mixed fund cleansing or rebasing will render these reliefs ineffective which could result in a significant increase in their tax liability.
In the case of the trust protections, these provide an ongoing benefit, potentially for many years in to the future and again there is reliance on the fact that a UK domicile of choice has not been acquired by the settlor. If HMRC were to assert that a domicile of choice had been obtained prior to setting up the trust, inheritance tax may be payable. Similarly if at any time whilst the trust is in existence the settlor loses his non-dom status, the trust protections (under the income and capital gains tax rules) would be lost and the settlor may be taxable on all income and gains arising at trust level.
Mitigating the risk
A domicile enquiry will be intrusive and may involve many months or years of correspondence with HMRC. Whilst the burden of proof rests with HMRC, in a typical case there will be numerous questions into background, lifestyle and family and social connections, both from a historic perspective and to establish future intentions in search of supportive evidence of the claim.
Acquiring and maintaining evidence of ongoing strong links to the country where you claim to be domiciled is essential, and equally evidence of your intention to leave the UK at a point in time should be clear. It may be worth considering having a domicile statement prepared which provides contemporaneous evidence in support of your claim to be non-UK domiciled.
Finally, it is important to remember that domicile may also be challenged on death, potentially bringing a foreign estate within scope of a charge UK inheritance tax. In this case, evidence of the intentions of the individual to leave the UK, supported by the necessary planning to achieve this will need to be provided by family members, executors and other relevant contacts, potentially delaying the distribution of the estate as a result. It is therefore important that any evidence of intentions is shared with family members who may find themselves having to defend a domicile challenge. Provisions included in a will can also be taken into account by HMRC in assigning a domicile and it is important that such document also supports non-domicile status.
If you would like to discuss any aspect of domicile and its impact on your tax position whilst living in the UK, please contact your usual Frank Hirth adviser.
Helen French, Frank Hirth
First published 12 July 2018