Domicile is one of the most fundamental concepts to get to grips with. It governs how much tax you pay, and specifically impacts your exposure to Inheritance Tax and whether you’re likely to face the UK’s 40% tax charge. It also determines if you’re UK tax resident, and how much UK Income Tax and UK Capital Gains Tax you’ll need to pay.
Domicile is a legal term used to define your ‘homeland’. Generally, you acquire a domicile of origin from your father and that domicile status and stays with you throughout your life. For example, if you were born in the UK, and so were your parents, it’s highly likely you will be UK domiciled, regardless of where you now live in the world.
Domicile is a separate tax consideration to your nationality, residence or citizenship and is not automatically reflective of the country you are currently living in or even the country you were born in.
According to the UK tax authorities, HMRC, everyone has a domicile status at every point in their lives. There are different types of domicile but it’s usually only possible to have one country of domicile at a time. Working out where you’re domiciled can be complex and a number of factors need to be considered.
There are four main categories of domicile.
- Domicile of origin: This is acquired at birth and is usually based on the domicile of your father. If your circumstances remain unchanged, you’ll typically retain your domicile of origin for life.
- Domicile of dependence: This domicile is acquired which happens, generally, if your father’s domicile changes before you reach 16 years of age. Before 1974 women who married usually automatically acquired the domicile of their husband.
- Domicile of choice: You can acquire a domicile of choice in a certain jurisdiction if you choose to and are willing to cut ties with your domicile of origin. If you have a home overseas and want to move there permanently, you may be able to change your domicile. Changing domicile is a very significant step and you will need to show that you have left your original home country behind you forever and chosen another country which is going to be your permanent home for the rest of your life. The onus is on you to prove that you have acquired a domicile of choice in another country.
- Deemed domicile: A person who has been resident in the UK for 15 out of the most recent 20 years is deemed to have acquired a UK domicile for all tax purposes.
Tax implications of a UK domicile
Your domicile status determines how much UK tax you need to pay. If you are UK resident and UK domiciled you will pay UK tax on all worldwide income and gains as they arise, regardless of whether the income and gains stay outside of the UK. If you are UK domiciled you will also face UK Inheritance Tax on all your worldwide assets – not just those in the UK.
Domicile rules for Inheritance Tax
When you die, domicile is the key factor in assessing how much UK Inheritance Tax is due on your Estate.
|Estate when UK domiciled
|Estate when not UK domiciled
|Inheritance Tax is due in the UK on all worldwide assets.
|UK Inheritance Tax is generally due only on assets held in the UK.
|40% charge applies.
|Overseas assets escape any charge.
|A tax-free allowance of £325,000 plus a £175,000 ‘family home allowance’ generally applies.
|UK assets generally enjoy a tax-free allowance of £325,000 plus a £175,000 ‘family home allowance’.
In summary, if you are UK domiciled all worldwide assets are exposed to UK Inheritance Tax; however, if you are non-UK domiciled it is generally only UK assets that are subject to UK Inheritance Tax.
Deemed UK domiciled
You may also be ‘deemed UK domiciled’ depending on how long you’ve been resident in the UK. From 6 April 2017, long-term UK tax residents with a non-UK domicile of origin are deemed to be UK domiciled once they’ve been a UK tax resident for 15 out of the 20 previous tax years.
Losing your UK domicile
It’s worth noting that domicile is a very adhesive concept and losing it is a complicated process. This means it will be down to you to establish proof that you have displaced your domicile of origin with a domicile of choice elsewhere. If you’re a British expat who has lived abroad for many years you may assume that you’ve automatically lost your domicile – but this is unlikely to be the case.
Losing your UK domicile of origin takes place through a complex process. The process requires you to provide clear evidence of your intention to permanently leave the UK and settle elsewhere. There are three key routes which can be followed:
- Long-term residence abroad: You need to be able to demonstrate that you have a clear intention to live permanently or indefinitely in another country.
- Severing all UK ties: You need to be able to demonstrate your intention that you will never reside in the UK again. If you remove all ties to the UK – selling property, closing bank accounts, and moving all financial links – you might be able to provide evidence that you’re permanently leaving the UK.
- Formal declarations: It is sensible to write a domicile statement declaring your intentions to leave the UK permanently and reside in another country for the rest of your life. In addition, you may consider renouncing your British citizenship in favour of the country which is now your permanent home.
There are a number of high-profile cases which demonstrate the difficulties when trying to lose your UK domicile and acquire a domicile of choice. Richard Burton, even though he lived the last 27 years of his life in Switzerland and chose to be buried there, was still deemed to be UK domiciled, with his Estate charged an Inheritance Tax bill of £2.4 million. The Jeremy Coller case also showed that an individual’s conduct carries more weight than written or oral statements when establishing domicile status.
Losing your UK domicile is possible, but it’s very hard to do and you should always seek specialist advice. A domicile review can help you understand what your exposure to UK tax is.
How and who decides?
The onus is on the person asserting that a domicile has changed to prove their case, whether that is HM Revenue or the taxpayer. If the parties do not agree the final decision is then escalated to the first and second tiers of the tax tribunals and ultimately the courts.
Understanding domicile and how it affects your wealth is important when you are considering your finances, and exposure to tax. To discuss your domicile and tax planning needs please get in touch with your nearest office.
For more information download our guide to understanding domicile.
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