How does changing your country of domicile affect your tax position?

Jon Croxford CTA, TEP, Managing Partner at Meridian Private Client LLP, explains how you can change your country of domicile and how this will affect your tax obligations.

How do you establish your current place of domicile?

Domicile is an old common law concept which is of huge importance to an individual’s tax position, having become a fundamental part of our tax legislation. Domicile does, however, still have relevance in certain areas of law, such as family law and also the ability to make a claim against an estate under the Inheritance (Provision for Family & Dependents) Act 1975 (‘the 1975 Act’).

Domicile is different to residence or nationality or citizenship; broadly speaking it equates to the place which is your true home. Whilst there is some additional definition in tax statute, the basic legal concept is something which has been refined by caselaw.

Everyone is born with what is termed a ‘domicile of origin’. In most cases this is the father’s place of domicile at the time of the child’s birth but, for children born to unmarried parents, the domicile of origin is derived from the mother.

How do you change your place of domicile?

A domicile of origin is normally displaced only when an individual acquires a ‘domicile of choice’ elsewhere. This would require the individual to effectively abandon their domicile of origin and settle elsewhere with the intention of remaining there indefinitely. Whilst the word ‘indefinitely’ appears vague, it has been held that this means permanently and can also be expressed as someone wanting to “end their days” there.

It is also necessary to take up residence in the claimed place of domicile of choice, not simply have the intention to reside there. Whilst many might consider that to be an obvious implication, it is important to understand that stated intentions alone are not enough, as is the idea of leaving the domicile of origin to roam the world. There must be a new place of permanent residence.

In addition to this, in certain situations an individual may acquire what is termed a ‘domicile of dependency’. Whilst a minor, a child’s place of domicile can broadly change in line with their father’s place of domicile. However, if the married parents of a child separate, the domicile of the child will follow that of the mother assuming the child remains living only with her.

A hangover from less enlightened times is that, for couples who married prior to 1 January 1974, the wife acquired a domicile of dependency by reference to her husband’s place of domicile and would automatically acquire any changes to his domicile. Whilst there is usually a clear linkage between the domicile positions of husband and wife, the two no longer automatically follow each other.

What are the practical issues when considering a change of domicile?

As can be seen, it takes very significant change to abandon a domicile of origin and acquire a domicile of choice elsewhere in the world. Clients will often express surprise when informed that, although they have been resident in the UK for many years, some as long as 30 or 40 years, their connections to their country of origin mean that they may still be non-UK domiciled. A useful response is a reminder that, for someone with a domicile of origin in the UK, it is equally difficult to leave the UK and acquire a foreign domicile of choice. The test cuts both ways and that is important to understand.

The burden of proof also lies with the person claiming that there has been a change of domicile. This means that, if leaving the UK, the taxpayer would need to provide proof that they had acquired a domicile of choice elsewhere. In reverse, HMRC would need to prove that someone who had moved to the UK has acquired a domicile of choice in the UK.

A lot may rest on the concept of where the individual wants to end their days. This is why the eager tax advisor will ask their client if they have bought a burial plot in their country of claimed domicile. Of course, the existence of genuine arrangements to be buried in a foreign country could be very telling, but if arranged primarily as a tax planning device with records of discussions between client and tax advisor, this would carry very little weight. Still, as part of the process of documenting an individual’s place of claimed domicile, burial arrangements can be included within a will and this can also recite the place of claimed domiciled. Thought should also be given to where the will is drawn up, perhaps ideally in the country of claimed domicile with a UK will dealing with only UK assets.

An often-overlooked practical point is that it is not always easy to determine the precise point at which a domicile of choice is acquired. Acquiring the intention to remain somewhere permanently is not necessarily something that happens overnight and may take years to complete. That might be evidenced by finally disposing of any property in the UK and only retaining a permanent ‘home’ in the place of claimed domicile, or it might be the step of acquiring citizenship in that place. Likely it will be a combination of factors and the precise date will be hard to pin down. It might not matter if that date was clearly many years ago, but it could be very important if the client is wanting to undertake planning steps now.

How does domicile fit into the UK tax system?

Deemed domicile

From a tax perspective, there is the additional concept of ‘deemed domicile’. Prior to the domicile tax reforms in 2017, an individual who came to the UK acquired deemed domicile status for inheritance tax purposes only after 17 years of residence in the UK. In reverse, a leaver from the UK who was non-UK domiciled in law would remain deemed domiciled in the UK for a further 3 years.

This changed in 2017 so that, broadly speaking, someone arriving in the UK and who remains non-UK domiciled in law will become deemed domiciled for all tax purposes once they have been UK resident for 15 of the previous 20 years. For inheritance tax purposes, someone who was UK domiciled in law will continue to be deemed domiciled for a further 3 years on ceasing to be UK domiciled. It should be noted that there are some other complexities which this article does not cover.

Income tax and Capital Gains Tax

Income tax and Capital Gains Tax are largely charged by reference to tax residence. A UK resident but non-UK domiciled individual may, however, claim to be taxed on the remittance basis. In short, this means that foreign source income and gains are only taxable when remitted to the UK. However, the individual must pay the remittance basis charge (essentially a tax in its own right) of £30,000 after 7 years of UK residence and £60,000 after 12 years of UK residence to be able to claim the remittance basis of taxation.

Therefore, for long stayers in the UK, claiming the remittance basis may only be worthwhile if there is a lot of tax relating to foreign source income and gains but the decision as to whether to claim the remittance basis can be reviewed each year and a separate decision made in relation to that year. After 15 years of residence, the individual becomes deemed domiciled in the UK and the ability to claim the remittance basis is lost.

Inheritance tax

Inheritance tax is charged almost solely by reference to domicile. A UK domiciled individual is subject to inheritance tax on their worldwide assets whilst a non-UK domiciled individual is only subject to inheritance tax on their UK assets.

Summary

Some years ago it was still possible to obtain a domicile opinion from HMRC. In this way, the tax advisor could effectively agree their client’s domicile position with HMRC before death or undertaking any significant tax planning. Unfortunately, that is no longer possible, and in some situations it may be wise to consider testing the position by, for example, making a chargeable transfer of excepted assets (such as cash held offshore) to a trust which is sufficiently more than the settlor’s nil rate band as to create a potential but real exposure to inheritance tax which hangs on the domicile status of the settlor.

Someone arriving in the UK with non-UK domicile status should take tax advice before arriving as there are various steps that can be taken to protect their tax position and, for example, make future remittance planning as simple as possible. After 15 years of UK residence and the acquisition of deemed domicile for tax purposes, their tax status will change but it may still be important to delay the acquisition of a domicile of choice in the UK for as long as possible. It may even be important for family law reasons or to avoid being the subject of a 1975 Act claim.

Once deemed domiciled in the UK after 15 years residence here, an individual will be fully within the scope of UK inheritance tax. One notable exception to this is someone who continues to be domiciled in one of a small number of countries where there is an old double tax treaty covering inheritance tax and which allows the concept of deemed domicile to be over-ridden. A key treaty is that between the UK and India, which does not charge an equivalent to inheritance tax. This requires careful planning, only applies on death and only in respect of non-UK situs assets.

It should also be borne in mind that the 2017 domicile changes introduced the concept of a ‘protected’ offshore trust so that offshore trusts established before the settlor becomes deemed domiciled in the UK will retain their tax advantages provided no property is added to the trust, thereby “tainting” it.

In reverse, someone leaving the UK to settle abroad may find it relatively easy to become non-UK resident and largely avoid UK income tax and Capital Gains Tax (except as regards certain types of UK source income and gains). However, on leaving the UK to settle abroad, it is likely to be far harder to acquire a domicile of choice outside the UK and, consequently, someone departing the UK may remain fully within the scope of UK inheritance tax for many years.

This article does not represent legal or tax advice and anyone interested in the subjects covered should seek appropriate legal or tax advice specific to their or their client’s circumstances before taking or refraining from any action.

About the author

Jon Croxford CTA, TEP is Managing Partner at Meridian Private Client LLP and specialises in residence and domicile issues and has been a tax partner at Meridian Private Client LLP for over eight years, having previously worked within the Big 4 accountancy practices.

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Inheritance (Provision for Family & Dependents) Act 1975 (Legislation)

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Publication date: 25 July 2022

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.