When it comes to tax planning, domicile is one of the most fundamental concepts to get to grips with. But why is it so important? And are there things you can do to change it? Peter Webb, our Head of Tax Advisory, explains what’s possible.
The importance of domicile arose recently following the revelation that the then Chancellor’s wife, Akshata Murty, had been able to save millions of pounds in UK tax because of her domicile status. As domicile is so significant it’s useful to dive a little deeper into this fundamental concept of UK taxation and consider whether or not it’s possible to change your domicile status.
Why does domicile matter?
We all have a domicile status at every point in our lives, and that status determines how much tax we pay. So, if you’re UK resident with a UK domicile you’ll pay tax on your income and capital gains which arise anywhere in the world. But if you’re a UK resident with a non UK domicile you’ll just be taxed on your UK income and gains, and can exclude any foreign income and gains from your tax bill if the right conditions are met. Perhaps the most compelling difference is when it comes to Inheritance Tax (IHT) – a UK domicile’s worldwide assets are liable to IHT at 40% but a non UK domicile will, generally, only pay that 40% tax on assets in the UK; overseas assets escape the charge.
So, with tax in mind, the question of whether a non UK domicile can become UK domiciled is an important one. And so is the query about whether a UK domicile can become non UK domiciled. Unsurprisingly it’s far easier for a non UK domicile to become UK domiciled, and bring assets into the UK IHT net, than it is for a UK domicile to shake off this status, and become non UK domiciled allowing the exclusion of overseas assets from IHT.
Domicile and residence
If you are non UK domiciled, and remain non UK tax resident (under the rules of the complex statutory residence test) your domicile status won’t change. However, as soon as you become UK tax resident that really helpful non UK domicile status is under threat. Once it becomes clear you’ve chosen the UK as a permanent home that non UK domicile status could evaporate and you’ll be seen to be UK domiciled by choice. And there are some tricky loopholes – if you’ve kept a non UK domicile but have been UK tax resident in 15 out of the last 20 years you’ll be classed as UK domiciled.
As soon as a UK domicile kicks in all worldwide income and gains are then subject to Income Tax and Capital Gains Tax. In addition (and perhaps most importantly) all assets held anywhere in the world are then within the reach of a 40% IHT charge. It’s worth speaking to a financial planner well before the risk of losing a non domicile status is on the horizon to see what can be done to protect against IHT on overseas assets in particular.
Choosing a domicile
On the flip side, is it possible to switch domicile away from the UK by choosing to be domiciled in another country? This is possible, but it’s very hard to do. In previous guidance HM Revenue said this about someone with a UK domicile acquiring a domicile of choice overseas:
“You have the capacity to acquire a new domicile (a domicile of choice) when you reach age 16. To do so, you must broadly leave your country of domicile and settle in another country. You need to provide strong evidence that you intend to live there permanently or indefinitely. Living in another country for a long time, although an important factor, is not enough in itself to prove you have acquired a new domicile.”
For a UK domicile you need to demonstrate that you have left the UK with no intention to return and, in addition, have chosen another country as your permanent home. Both conditions need to be fulfilled and can be difficult to prove. And if you become UK tax resident again in the future you are treated as though that domicile of choice had not been acquired.
There are two fascinating case studies which illustrate the difficulties of demonstrating you’ve acquired a domicile of choice outside of the UK to displace a UK domicile of origin.
Domicile in action – Sir Charles Clore
This case involved the late British financier Sir Charles Clore who had retired to Monaco for tax reasons. He was a fascinating character and his story involves being the victim of an art theft and a link to one of Britain’s biggest spy scandals. HMRC investigated his case in great detail when he died, and it was clear from friends and acquaintances that Sir Charles was not happy in Monaco, spent much of his time in Paris and mentioned to close friends that he longed to return to England. On his death HMRC went to the trouble of calling witnesses to testify that Sir Charles had not been happy in Monaco and longed to return to the UK, which proved fatal to the claim of non domicile.
Domicile in action – Sir Richard Burton
Sir Richard Burton moved to Switzerland in 1957 and spent the remaining 27 years of his life living there in the hope of claiming that he had acquired a domicile of choice. He was actually buried in Switzerland but his request for burial of his body in a red suit, together with a copy of Dylan Thomas’ poems and his coffin being draped in the Welsh flag, scuppered his plans to avoid IHT. The result was an IHT bill of GBP2.4 million, when the UK tax authorities successfully claimed that he had always kept his affection for Wales.
The lessons to be learned from these examples is that, although it’s possible to displace your UK domicile with a domicile of choice somewhere else, it’s very hard to do so. There is significant specialist advice needed; particularly for how you can provide evidence of your change in domicile status.
To discuss any aspect of your UK tax status, including domicile, please contact your nearest office.