What is domicile?
Domicile is different from a person’s nationality or place of residence; instead it considers where an individual is regarded as having their ‘home jurisdiction’.
Whilst it is possible for an individual to change their domicile, it is notoriously difficult to do so, as the location of domicile has a very enduring quality.
There are three types of domicile under general UK law: domicile of origin, domicile of dependency and domicile of choice. A person can only have one domicile at any one time.
Domicile of Origin
All individuals acquire a domicile of origin at birth. If the individual’s parents were married at the time, then the individual takes his or her father’s domicile at the time of birth. If the individual’s parents were unmarried, then it is the mother’s domicile at the time of the individual’s birth that is acquired.
Domicile of Dependency
Until an individual reaches the age of 16, they do not have the capacity to acquire a new domicile of choice; instead, their domicile follows that of the person on whom they are legally dependent. This is known as a “domicile of dependency”.
So, for example, if an individual’s parents were originally from the UK, but then emigrated to France before the individual’s 16th birthday and that emigration is permanent, then the parents might be said to have acquired a domicile of choice in France and thus the minor’s domicile of dependency will change also.
Domicile of Choice
A domicile of choice refers to a situation where an individual takes on a new jurisdiction as being his chosen domicile. It is not possible to acquire a domicile of choice before the age of 16.
An individual’s country of domicile is generally the one in which they were ‘born and bred’ and which they look on as being ‘home’ even though they might not live in that particular jurisdiction for many years.
To take on a new domicile, the individual must relinquish their current country of domicile in favour of a new permanent home. There are two key elements that must be present to acquire a new domicile of choice: physical presence in the territory concerned and an intention to reside there permanently or indefinitely.
Although domicile is as much a state of mind as anything else, as mentioned above it is very difficult for an individual to change their domicile and it is likely that they will have to provide significant evidence to HMRC to prove that they have done so.
If an individual abandons their domicile of choice, the domicile of origin automatically revives (even though the individual may have no intention of returning there) until a new domicile of choice is established.
Deemed Domicile
Under UK tax law, there is also a fourth type of domicile:“deemed domicile”.
Prior to 6 April 2017, this only applied for UK inheritance tax (“IHT”) purposes; however, from 6 April 2017 it applies to income tax and capital gains tax (“CGT”) as well.
From 6 April 2017 an individual will be deemed domiciled in the UK for UK tax purposes if either:
- they are domiciled outside of the UK but were born in the UK with a domicile of origin and are resident in the UK for the relevant tax year; or
- they have been resident in the UK for at least 15 of the preceding 20 tax years.
Deemed domicile is specifically a UK tax concept. An individual can be deemed domiciled for UK tax purposes whilst also being domiciled as a matter of general law outside of the UK.
How does domicile impact on an individual’s UK tax liabilities?
Income Tax and Capital Gains Tax
Individuals who are resident in the UK are generally taxable on their worldwide income and gains as it arises (“the arising basis”). However, where an individual is resident in the UK but they do not have a UK domicile (or deemed domicile), they will be taxed on their UK income and gains on the arising basis, but they can elect to only be taxed on foreign income and gains at the point they are brought in to the UK. This is known as “the remittance basis”.
In the first 7 years of a non-UK individual’s residence in the UK, they can elect for the remittance basis without any charge. However, once the individual has been resident in the UK for 7 out of the 9 preceding tax years, they must pay an annual charge to be able to retain the right to use the remittance basis. There are two levels of charge, depending on the number of years the individual has been resident in the UK:
- UK resident for at least 7 out of the 9 preceding tax years: £30,000
- UK resident for at least 12 out of the 14 preceding tax years: £60,000
Once the individual has been resident in the UK for 15 out of the previous 20 tax years, they will no longer be able to claim the remittance basis and will be “deemed domiciled” in the UK for all taxes and taxable on their worldwide income and gains as they arise.
Where an individual claims the remittance basis, they lose the right to their annual personal allowance and capital gains tax annual exemption. In addition, any foreign dividends remitted are taxed at the main income tax rates, i.e. 20%, 40% and 45%, rather than the lower dividend rates of 7.5%, 32.5% and 38.1%. The 0% dividend allowance is also not available for remitted dividend income.
For some individuals – either those with relatively small amounts of foreign income and gains or those with significant foreign income and gains – it will usually be obvious whether a claim to the remittance basis should be made, particularly where the remittance basis charge and loss of allowances is at point. However, for others it may be necessary to do some calculations each year to weigh up whether the remittance basis should be claimed.
Inheritance Tax
Individuals who are domiciled in the UK are subject to IHT on their worldwide assets, whereas non-UK domiciled individuals are subject to IHT only on their UK assets. From 6 April 2017, this has included UK residential property owned by a foreign company of which the individual is a shareholder.
Once an individual becomes deemed domiciled for UK tax purposes, they will be subject to UK IHT on their worldwide estate.
What about offshore trusts and companies?
There is a whole separate regime for offshore trusts and companies. Please refer to our separate article on this for further details.
Remitting funds to the UK
Ideally, before an individual first becomes resident in the UK for tax purposes, any pre-arrival “clean capital” should be identified. This clean capital will usually be comprised of the cash balances held in non-UK bank accounts at the point just before the individual becomes UK resident, but a full review should be carried out before the individual arrives in the UK to identify the clean capital available and ring-fence this so that it can be used in the UK without any UK tax liability arising.
Any foreign income and gains arising after the individual has become UK resident will crystallise a UK tax charge if the individual uses those funds in the UK.
It is therefore important that such monies are kept separate from the clean capital, otherwise a mixed fund will be created and any funds brought to the UK from the account will be deemed to have come from taxable monies in priority.
What is a Remittance?
The definition of a remittance is very wide and is not simply where funds are brought directly to the UK. A remittance can, for example, include paying for expenses in the UK on a foreign credit card or bringing non-cash assets in to the UK.
Please refer to our separate article on remittances, which provides more detail.
How can we help?
The UK tax rules surrounding domicile are complex and advice should always be sought before action is taken.
We have extensive experience in assisting individuals both with pre-arrival tax planning and once they have arrived in the UK. We can advise on both residence and domicile issues and the impact of these on the individual’s circumstances.
We can also assist where a non-UK domiciled individual owns UK property within a trust and/or corporate structure and advise on the tax impacts of that structure and whether there are more tax-efficient ways of holding the property in line with the individual’s plans.
We are always happy to have an initial telephone conversation or meeting, at no cost to you, to see how we can help.
We can be contacted on +44 (0)207084 5771 or advice@charter-tax.com.
Disclaimer
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 30 October 2017.
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.
