Is your Domicile Affecting your UK Tax Liability?
Our short guide to Domicile
Why is domicile important?
Domicile is a critical consideration in establishing the extent to which an individual is liable to UK taxation. Domicile, together with the concept of 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.
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.
There are three different types of domicile which is a question of fact:
“Domicile of origin” – this will often be the country in which you were born and is usually determined by reference to your father’s domicile. However, 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.
“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.
“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. 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.
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.
‘Deemed domicile’ – the 15/20 rule
From 6 April 2017, any non-domiciled individual who has been resident in the UK in at least 15 of the past 20 tax years (including split years) will have become ‘deemed’ UK domiciled for income, capital gains and inheritance tax purposes. In other words, for the first time long term resident non-domiciled individuals will be UK taxable on a worldwide basis.
Such individuals will no longer be able to use the remittance basis for future offshore income and gains arising after the date they become deemed domiciled (i.e. 2017/18 and subsequent tax years for those who became deemed domiciled on 6 April 2017). Prior overseas income and gains will remain taxable if remitted into the UK. Both offshore and UK assets will be subject to UK inheritance tax when the taxpayer is deemed UK domiciled, subject to any specific double taxation treaty override.
Your domicile can have a dramatic effect on defining your UK tax liability. Therefore it is crucially important for you to assess how many consecutive years you have been living in the UK in the last 20 years and seek independent tax advice on the implications of your domicile status.
How can we help?
Our Private Client Department is here to advise you on the above changes and your tax position generally. If you have any queries, please contact our Partner and Head of Private Client Department, Elena Tzialli.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
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