By Joshua Fowler, Solicitor.
There has been much reporting in recent weeks on the domicile position of members of parliament and their spouses. The law of domicile is a key concept of UK common law that has a significant impact on how various UK and international laws apply to individuals.
This article will review the impact of domicile on UK tax and explain some key aspects of the law of domicile.
How does domicile affect UK tax? – Income Tax and Capital Gains Tax (CGT)
UK tax resident individuals pay income tax and CGT on their worldwide income and gains.
UK tax resident individuals who are non-UK domiciled have the right to claim the “remittance basis” on their tax returns, but may choose not to. If a person claims the remittance basis they pay UK income tax and CGT on their UK income and gains and on their foreign income and gains which they bring to the UK. They don’t pay UK tax on foreign income and gains that are kept outside of the UK.
The remittance basis of taxation is claimed on annual basis and is free to claim for the first seven years of UK tax residence. There is a charge of £30,000 to claim the remittance basis once the person is UK tax resident seven out of the previous nine tax years and this increases to £60,000 once they’ve been UK tax resident for 12 out of 14 years. They cannot claim the remittance basis once you satisfy the 15/20 rule (discussed below).
Individuals who claim the remittance basis are unable to claim their annual allowances for income tax and CGT purposes.
How does domicile affect UK tax? – Inheritance Tax (IHT)
Generally speaking a non-UK domiciled person is only subject to UK IHT on their UK assets. UK domiciled individuals are subject to IHT on their worldwide assets. This can be relevant on death and during a person’s lifetime as a non-UK domiciled person may set up an Excluded Property Trust. This is subject to the “deemed domiciled” provisions as discussed below.
Where a married couple have a mixed domiciled (i.e. one is UK domiciled and one is non-UK domiciled) this can also affect the IHT reliefs that are available to them.
Domicile – key concepts
Every individual has a domicile and may only have one domicile at a time. Domicile is sometimes defined as “permanent home”, with the emphasis on “permanent”. For the purposes of UK law, what is relevant is whether a person is or is not domiciled in the UK – referred to as a “non-dom”.
Domicile is a separate concept to tax residence or nationality. It isn’t decided by a person’s visa, passport, where they or their spouse live, where their habitual residence is or where they work, although these are factors that may be taken into consideration in the assessment of their domicile.
The rules to determine a person’s domicile are set out in two places: common law, which is the general law of the UK and based on case law, and tax statute. For tax purposes a person’s domicile is the place where they are domiciled at common law unless that is overridden by specific statutory rules.
Domicile – common law
An individual’s domicile under common law is determined by analysing, in detail, their circumstances and intentions at the relevant time. A person will always have either a domicile of origin, a domicile of dependence or a domicile of choice.
Domicile of origin – every person has a domicile of origin at birth:
- If their parents were married at the time of their birth the domicile of origin is the domicile of the father at the time the person was born
- If their parents were not married at the time of their birth (either due to divorce or the death of your father before they were born) the domicile of origin is the domicile of the mother at the time the person was born.
- The domicile of origin may be displaced by another domicile but will be revived if the new domicile is lost.
The domicile of origin is not based on the jurisdiction the person is physically born, or where their parents happen to live at the time of the birth. As a result, it is possible for a domicile of origin to be passed down through several generations to someone who has never spent any length of time in the country.
Domicile of dependence – where an individual is dependent on another person, the domicile may follow theirs. This can be:
- If they are under the age of 16 and their parents are married and living together, the domicile of origin will change to a domicile of dependence where the father is domiciled;
- If they are under the age of 16 and their parents are not married, or are not living together and they have no home with their father, the domicile of origin will change to a domicile of dependence where the mother is domiciled.
- Before 1 January 1974 a married woman’s domicile would change with that of her husband.
Domicile of choice – any person with legal capacity can obtain a domicile of choice if they:
- Reside in a different jurisdiction from their domicile of origin.
- Have the intention to remain there permanently and indefinitely. This is often expressed as meaning that the person wants to “end their days” in this jurisdiction.
Proving the acquisition of a domicile of choice is not easy. HMRC describe it as “an inference that the law makes from the facts” and so supporting evidence showing a change of domicile is key.
The intention to obtain a new domicile isn’t relevant, it’s the intention of permanently residing which is important. A simple declaration of a person’s domicile can therefore be disregarded if there is no evidence showing there is the intention to end their days in that jurisdiction.
In order to lose a domicile of choice a person must leave that jurisdiction and intend for that departure to be permanent. In HMRC’s view “it is generally easier, in practice, to prove the loss of a domicile of choice than its acquisition”. The domicile of origin would then automatically revive.
Proving your domicile
If a domicile is challenged it is for the person who is claiming the change in domicile to prove the change has occurred. There is no exhaustive list that shows the intention to remain permanently or indefinitely but HMRC will consider:
- A person’s intentions
- Their permanent residence
- Their business interests
- Their social and family interests
- Ownership of property
- The form of any Will that has been made
It’s no longer possible to apply for a ruling on a person’s domicile position before submitting a tax return to HMRC. However, it may be possible to make an election that a person is UK domiciled for IHT purposes if they have a UK domiciled spouse.
Deemed domicile – statutory rule
A person who is non-dom under the common law rule may be treated as UK domiciled for UK tax purposes in certain circumstance, namely, if they are:
A non-UK domiciled individual who has been domiciled in the UK within three years
An individual who has been tax resident in the UK in 15 out of the previous 20 tax years (the 15/20 rule)
An individual with a UK domicile of origin, and who was born in the UK, who has acquired a non UK domicile of choice but is UK tax resident (“formerly domicile resident”).
Particular occupations also have special rules with regards to their tax residence and domicile status. For example, members of parliament are deemed UK domiciled for the whole tax year in which they are a member.
What about tax treaties?
The above is an overview of the default position under UK law. The UK has multiple treaties with different jurisdictions in respect of tax. The majority of these are focused on income tax and CGT. The aim of these treaties is not to prevent tax, but to agree which country has primary taxing rights and, where tax is paid in the primary jurisdiction, the treaties allow for a tax credit against the liability arising in the secondary jurisdiction. It is often decided on where the asset is based and what a person’s “treaty residence” is which is decided on separate factors to domicile.
The UK has a limited number of treaties in respect of IHT. Some of these treaties, including that with India, can override the deemed domiciled provisions in UK statues.
You can find out more information about our international tax services here.