An individual’s domicile status is important when deciding if, and to what extent, they are liable to tax in the UK. A key point to appreciate is that the common law concept of domicile is different from residence. Domicile is a legal concept and is often defined as the place where a person has their permanent home.
Types of domicile in the UK
An individual must have a domicile but can only have one country of domicile at a time. An individual’s domicile can change and it can often be quite hard to determine someone’s domicile position. There are three types of domicile in UK law:
- Domicile of origin;
- Domicile of dependency; and
- Domicile of choice.
Initially an individual’s domicile will be their domicile of origin, although this may subsequently be changed by either a domicile of dependency or domicile of choice.
Domicile of origin is acquired at birth and in England and Wales is typically the same as their father’s domicile when they are born, if their parents are married, and their mother’s domicile if they are not.
A child may acquire a domicile of dependency if a parent changes their own domicile whilst the child is under the age of sixteen and they are still dependent on that parent.
How to acquire a domicile of choice
To obtain a domicile of choice, an individual must reside in a jurisdiction different to their domicile of origin and form a clear and fixed intention of making that new place their permanent home or to reside there indefinitely.
This relies on an individual taking up residency in another country and clearly demonstrating their intention over time to remain there indefinitely. There is also a requirement to sever ties to the country where their domicile of origin or dependency is.
It can be hard to establish a domicile of choice and for an individual to lose their domicile of origin. If an individual leaves a domicile of choice, then they revert automatically back to their domicile of origin until they have acquired another domicile of choice.
Why is domicile status relevant?
From a UK tax perspective, a non-UK domiciled individual may have a more favourable UK tax position, for example, non-UK assets are not normally liable to UK Inheritance Tax. However, if an individual resides in the UK for a long period of time, they may be considered deemed domicile.
An individual who is either UK domiciled or is deemed domicile in the UK is liable to UK Inheritance Tax on their worldwide assets.
What does it mean to be 'deemed domicile'
There has been a concept of deemed domicile for UK Inheritance Tax purposes for many years; however, from 6 April 2017, amended rules were introduced to bring them in line with the new deemed domicile rules for Income Tax and Capital Gains Tax.
Broadly, an individual who is not otherwise domiciled in the UK will be deemed to be domiciled in the UK if they have been UK tax resident for at least 15 of the 20 tax years immediately preceding the relevant tax year.
If a non-UK domiciled person subsequently decides to leave the UK, as long as they spend at least six consecutive complete tax years outside the UK, they will no longer be deemed domiciled for Income Tax and Capital Gains Tax purposes.
For Inheritance Tax purposes, they would cease to be deemed domiciled if they are non-UK resident for four complete consecutive tax years, with the deemed domicile status falling away at the beginning of the fourth tax year of non-residence.
This is beneficial for individuals who have been long-term resident but wish to avoid the new rules, as it allows them to shed their deemed domicile status relatively quickly after leaving the UK. However, if a non-domiciled individual wishes to restart the clock for the 15-year test, they would have to remain overseas and be considered a non-UK resident individual for six complete tax years before becoming UK resident again.
Formerly domiciled resident status
Formerly domiciled resident status is for individuals who have left the UK and taken up a domicile of choice in another country, but were born in the UK with a UK domicile of origin.
From 6 April 2017, if they decide to return to the UK their domicile of origin status is reinstated immediately for Income Tax and Capital Gains Tax purposes. For Inheritance Tax purposes it is revived from the start of the second tax year of their residence in the UK.
An individual’s domicile status can be quite complicated to ascertain and therefore we recommend that you take professional advice if you have any questions regarding your domicile position and the implications for your UK tax status.
How to seek advice on domicile status
The Shorts team has extensive expertise in helping people understand the tax implications of their domicile status, in addition to any other cross-border tax considerations. If you have a query about anything mentioned in this guide, we will be more than happy to discuss your situation and offer tailored, qualified advice; please contact us today for a consultation.
Tags: International Taxes