Do you know your domicile?
Why is it important to know your domicile?
Domicile is a critical aspect in establishing the extent to which an individual is liable to UK taxation. Domicile, together with the concepts of residence and ordinary residence, is used to ascertain the level of connection an individual has to the UK in order to determine the relevant basis of taxation- the closer the connection to the UK, the greater the liability to UK taxation.
In particular, domicile is used to determine an individual’s liability to inheritance tax on assets situated offshore and is the fundamental component in establishing whether the remittance basis could be applicable to the taxation of foreign income and gains.
It is important to note that new pending legislation on tax residence will become applicable with effect from 6th April 2013.
What is domicile?
There is no statutory definition of domicile in the context of UK taxation, instead we use its ordinary meaning and the doctrines as set out in case law. Domicile is confirmed by applying a set of principles to the personal circumstances of the individual, particularly with regard to the elements of residence, permanence and the individual’s intention which are imperative to any determination.
Three different types of domicile:
1. Domicile of Origin
Each individual obtains a domicile of origin at birth. This is usually determined by reference to your father’s domicile, but if your parents are unmarried at the time of your birth, or your father dies before your birth, you will instead acquire your mother’s domicile.
For example, an individual born in the UK to parents who are married with a non-UK domiciled father and a UK domiciled mother may have a non-UK domicile of origin.
2. Domicile of Dependence
Where an individual is legally dependent on another, their domicile will mirror that of the person on whom they depend. Before 1st January 1974, a married woman was also considered to be dependent on her husband for the purpose of domicile.
3. Domicile of Choice
Any individual who has legal capacity could potentially acquire a new domicile of choice, but in order to do so they will need to demonstrate an intention to remain permanently or indefinitely in the new country. In other words, they must intend to make their home in the new country until the end of their days or until something happens to make them change their mind.
Unless an individual forms the requisite intention to settle permanently or indefinitely they will not fulfil the essential condition of acquiring a domicile of choice and will either retain their domicile of origin or a previous domicile of choice.
Main domicile principles
- Every individual has one and you cannot be without one – each person acquires a domicile of origin at birth that will remain until displaced by the acquisition of a domicile of choice and will revive where a domicile of choice is lost without replacement.
- You can only have one at a time – you have to lose one domicile in order to acquire a new one. Therefore, you must cease to live in one country and intend for that cessation to be permanent and at the same time reside in another country intending to remain there indefinitely.
- Domicile is not necessarily the same as your permanent home and may be in a country you have never been to.
- Domicile is not the same as citizenship, nationality or residence but these may impact on your domicile.
- Any assertion of a change in domicile will need to be proven by the person asserting the change – the evidence will need to show the requisite intention to acquire a new domicile and remain permanently or indefinitely. An individual’s current personal links must also be consistent with that intention.
Acquisition and Loss of Domicile
In most cases an individual will retain their domicile of origin throughout their lifetime. The adhesive quality inherent to a domicile of origin means it is difficult to lose. Even when you acquire a domicile of choice, the domicile of origin will remain dormant and will revive if there is a delay between the loss of one domicile and the acquisition of a new one. It is much easier to replace one domicile of choice with a new domicile of choice, than to lose your domicile of origin in favour of a domicile of choice.
Two key factors of Domicile
In the context of domicile, residence means being physically present in the country as an inhabitant of it as opposed to just a visitor or traveller. All the components of an individual’s life will be relevant in deciding whether they are truly resident. Even in cases where an individual genuinely lives in more than one country there will always be one main or chief residence, therefore to change domicile you would need to shift the location of your chief residence. It is possible, however to be tax resident in more than one jurisdiction.
A significant difference between residence in the context of domicile and residence for UK tax purposes is that the length of time spent in the country does not correlate to acquiring a domicile, whereas for tax purposes you could be resident as a result of regular visits without any intention to inhabit the UK.
There must be an intention to live in the UK permanently or indefinitely and this must be the only intention, you cannot have the same intention towards multiple countries.
A decision to spend the rest of your life in a country will carry the requisite intention to change domicile. However, an intention may be found to be of sufficient substance in some cases even if it is based on a contingency.
Although each case will depend on the particular facts it is essential that the intention is a voluntary decision, and not one that is for a particular purpose or the result of some constraint such as duties of office, demands of creditors, or the relief from illness.
Inheritance Tax and Domicile
Individuals who are not UK domiciled only pay inheritance tax on their assets located in the UK, whereas those domiciled in the UK pay inheritance tax on their worldwide assets.
As inheritance tax is calculated at a rate of 40% on all chargeable assets above the nil rate band (presently £325,000), this distinction could be of great consequence. Therefore, consideration of domicile is important in any planning exercise.
In addition, once an individual has been tax resident in the UK for 17 out of 20 tax years, they will become deemed domiciled in the UK for inheritance tax purposes regardless of whether they have acquired a UK domicile of choice and their worldwide assets will then fall within the UK inheritance tax net.
However, deemed domicile does not affect the applicability of the remittance basis and it is possible to break deemed domicile by a sufficient period of absence from the UK.
The court is unlikely to pay much attention to the individual’s own belief in domicile, but instead will be influenced by the evidence in support of that belief. Consequently a careful analysis of all the relevant factors, by applying the legal principles, is required to establish your domicile status.
It is therefore crucial to obtain advice on your domicile. Individuals should review their domicile position as circumstances change particularly those who travel extensively, work offshore for extended periods of time or hold assets in multiple jurisdictions. There can be far reaching tax consequences that may be mitigated by incisive and timely domicile planning as well as to ensure you are tax compliant.
Partner, Head of Private Client
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.