Understand why domicile status can be important in establishing an individual’s tax liability.
- The concept of domicile provides the link between an individual and a jurisdiction
- When an individual is born he/she acquires a domicile of origin
- Acquiring a domicile of choice involves satisfying a "two pronged" test
- The concept of deemed domicile applies to long term UK residents
Why is domicile status important?
An individual's domicile status is a fundamental factor in determining his/her liability to UK tax (particularly inheritance tax). It also has implications for other branches of the law.
What is domicile?
Domicile is the concept in international law which links every individual to a particular legal system. That legal system is the legal system applying in that individual's permanent home or domicile.
Why is domicile important?
Many people are internationally mobile. It is therefore essential to have a way of establishing which system of law and which country's courts governs questions relating to an individual's civil status (such as marriage, divorce and legitimacy) and some aspects of property ownership (such as the devolution of moveable property on an intestacy).
The concept of domicile provides the link between an individual and a jurisdiction.
Domicile is a neutral rule of law for determining the legal system with which an individual has the most appropriate connection. Domicile's main feature is that it attempts to connect a person so far as it is possible with the country in which he or she has a permanent home or in which he or she lives indefinitely.
In addition to the basic principle outlined above, the law of domicile is used by many jurisdictions to determine an individual's liability to tax.
An individual is domiciled in a particular legal system which might not be a country. In the United Kingdom an individual is domiciled in Scotland, Northern Ireland or England & Wales. (Wales does not have a separate legal system - it shares its legal system with England.) In the USA an individual is domiciled in a specific state.
Domicile of origin
When an individual is born he/she acquires a domicile of origin.
This is the domicile of the child's father (or if the child is illegitimate his/her mother).
Domicile of choice
On attaining age 16 the individual can shed the domicile of origin and acquire a domicile of choice.
The individual can retain this domicile of choice indefinitely.
Alternatively he/she could acquire another domicile of choice.
The individual could abandon the domicile of choice without acquiring a new domicile in which case the domicile of origin will revive.
The acquisition of a domicile of choice involves satisfying a "two pronged" test.
(a) the individual must physically reside in the new jurisdiction, and
(b) the individual must form the intention to live permanently or indefinitely in the new jurisdiction having no real intention of living anywhere else.
The first part of this test is easy to "prove"; the second incredibly difficult.
The Courts have considered the acquisition of a domicile of choice on many occasions.
The UK Courts have adopted the approach that the acquisition of a foreign (to the UK) domicile of choice is only to be imputed to an individual on the basis of clear and unequivocal evidence.
Two contrasting cases regarding the acquisition of a domicile of choice
IRC v Bullock: Mr Bullock had a domicile of origin in Nova Scotia. He lived in England for 40 years. His wife didn't want to live in Nova Scotia. Mr Bullock hoped to return there should he persuade his wife to change her mind or should he survive her. It was held by the Courts that he had a real determination to return rather than a vague aspiration. Accordingly he retained his Nova Scotian domicile of origin and had not acquired an English domicile of choice.
Furse v IRC: Mr Furse expressed a wish to live in England for the rest of his life save only for a contingency that he would return to the USA should he cease to be physically able to take an active interest in his farm (situated in England). The Courts decided that this intention was so vague as to impose no limit on his intention to remain in England. According he had acquired an English domicile of choice.
Case studies illustrating the concept of domicile of choice
David's father has a domicile of origin in Scotland. He was a university lecturer and had a post as a lecturer at the University of Tubingen in Germany. David was born there and spent the first twelve years of his life in Germany. His father then moved to Finland, having been appointed professor at the University of Uppsala. He retired to Scotland earlier this year as had always been his intention. David went to school in Germany and is currently at University in Munich. When he graduates he intends to do voluntary work in either Africa or Asia before deciding on a career. David has never been to Scotland. Where is David domiciled?
David is domiciled in Scotland, even though he was born in Germany and has never set foot in Scotland! His father never lost his Scottish domicile of origin - although he spent many years in Germany he never intended to stay there permanently - he always intended to retire to Scotland. At birth David acquired his father's domicile of origin. He has not acquired a domicile of choice as he has not made up his mind where he wants to permanently and indefinitely reside.
Anne's grandfather, domiciled in England, worked in the Indian Civil Service for over thirty years. He had intended to return to England on retirement but died whist still in India. Anne's father was born in India. He was educated in India and England and when in his early twenties moved to Switzerland to work for a bank. He acquired a Swiss wife and a Swiss domicile of choice. Both he and his wife inherited significant wealth and decided to leave Switzerland and travel. They lead a nomadic lifestyle. Anne was born in Sydney, Australia and is currently working for UNESCO on a variety of short term projects. Anne has never visited England but hopes to do so in the near future. Where is Anne domiciled?
Anne is domiciled in England. Her father took his father's domicile of origin but later acquired a Swiss domicile of choice. This was "lost" when Anne's father left Switzerland (domicile of choice being based on permanent residence) and his English domicile of origin revived. So when Anne was born she acquired her father's domicile of origin. She hasn't acquired a domicile of choice to overturn that.
Domicile of dependency
As mentioned above children who have not yet attained age 16 have the domicile of their father (or mother if the child is illegitimate).
The domicile rules set out above apply equally to married women where the marriage took place on or after 1 January 1974.
Marriage of itself does not cause a change in domicile. However a decision made by a non-UK domiciled individual to marry someone domiciled in the UK and set up a home in the UK could be evidence of an intention to live permanently or indefinitely in the UK.
Where, before 1 January 1974, a married woman had a non-UK domicile of choice and married a UK domiciled individual she acquired a UK domicile of dependence. On 1 January 1974 this domicile of dependence was converted to a domicile of choice by operation of law (and not on general principles).
This is a difficult area of law and specialist legal advice should be taken where the domicile status is relevant.
From 6 April 2017, new deemed domicile rules came into force. An individual who is not domiciled in the UK under common law will be treated as domiciled in the UK for all tax purposes if either Condition A or Condition B is met.
To meet this condition an individual must:
- be born in the UK
- have the UK as his/her domicile of origin
- be resident in the UK for 2017 to 2018, or later years
Condition B is met when the individual has been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year.
This will mean that from their 16th tax year of UK residence long term residents will no longer be able to access the remittance basis and will be subject to tax on an arising basis on their worldwide personal income and gains. At this point inheritance tax will also be paid on worldwide personal assets.
The new rules are effective from 6 April 2017 irrespective of when someone arrived in the UK. There will be no special grandfathering rules for those already in the UK.
Once the non-dom who has become deemed domiciled under the 15 year rule leaves the UK and spends more than 5 tax years outside the UK they will at that point lose their deemed tax domicile ('the 5 year rule'). In practice, once they cease to be UK resident, their deemed tax domicile is likely only to be relevant for inheritance tax purposes. There will therefore be a longer 'inheritance tax tail' for non-doms who leave the UK than was previously the case where a 4 year rule applied.
In order to have parity of treatment between UK doms and non doms, UK doms who leave after 5 April 2017 having been here for over 15 years will also be subject to the five year rule even if they intend to emigrate permanently and settle in a particular place on the day of their departure.
If at a later date (having spent more than 5 tax years abroad) the non-dom returns to the UK for a period but still intends eventually to leave the UK and therefore remains foreign domiciled under general law they will be able to spend another 15 years as a resident for tax purposes before becoming deemed domiciled again. (This will not apply to returning UK doms who are subject to different rules).
The deemed domicile of the long-term resident non-dom has no effect on the domicile status of the children, whose actual and deemed domicile position is looked at independently. Thus they will take their father's domicile under general law at the date of their birth and if they are long term residents within the new rules will become deemed domiciled here. But they do not become deemed domiciled here simply because either parent is deemed domiciled here nor do they lose deemed domicile just because a parent does.
Additionally, from 6 April 2017 there is a new category of deemed domicile – ‘formerly domiciled resident’
An individual is a formerly domiciled resident if he/she
- was born in the UK with a UK domicile of origin
- acquired another non-UK domicile of choice
- is resident in the UK and has been resident in the UK in at least 1 of the 2 previous tax years
Essentially the government wishes to make it harder for individuals who have a UK domicile at the date of their birth to claim non-dom status if they leave the UK and acquire a domicile of choice in another country but subsequently return here.
If an individual is a formerly domiciled resident, property he/she settled on trust when they weren’t domiciled in the UK can’t be excluded property for IHT purposes. This doesn’t apply for those only deemed domiciled under the new rules.
The new trust protection measures make sure an IHT trust charge doesn’t arise when an individual is no longer:
- resident in the UK
- a formerly domiciled resident
Non doms who have set up an offshore trust before they become deemed domiciled here under the 15 year rule will not be taxed on trust income and gains that are retained in the trust and such excluded property trusts will have the same IHT treatment as before (subject to the following)
An individual who is not domiciled in the UK is not liable to IHT on any of their property which is situated outside the UK (excluded property). The IHT legislation provides the same treatment where property is held in a trust created by a settlor who is domiciled outside the UK (an ‘excluded property’ trust). Therefore, it was the case that a UK residential property which was held by such an individual through an overseas company, trust or similar structure, would be treated as situated outside the UK and therefore outside the scope of IHT.
Accordingly, the IHT legislation has been amended to extend the scope of IHT to residential properties situated in the UK which are held by non-domiciled individuals through an overseas company, trust or partnership. This will be the case whether or not the individual is resident in the UK.
The measure applies to all chargeable transfers which take place on and after 6 April 2017.