In the last year, it has been impossible to miss the discussion of domicile and the debate around the so-called “non-dom” status in the news cycle. The revelation that Rishi Sunak’s wife is non-UK domiciled pulled the topic to the forefront of public consciousness and it has since been discussed in countless newspaper articles, opinion pieces and regularly raised at PMQs. Labour has pledged to scrap non-dom status if they win at the next election and this has given rise to some speculation that the Conservatives will amend the rules around the non-domiciled regime in order to take some wind out of Labour’s sails.
Whilst there has been a lot written on the topic, many articles simply provide a sentence or two explaining domicile in the most basic terms. This is understandable given most readers do not open their newspaper (or more likely, their app, in the modern world) wanting a detailed analysis of a specific point of law which only affects a minority of people. However, for those individuals with international connections, it has thrown up many important questions, primarily “What is domicile?”, “What are the implications of being non-UK domiciled?” and “How will any potential changes affect me?”
What is “domicile”?
The concept of domicile under English law has been established by case law. No one can be without a domicile under English law. Domicile is different to a person’s place of residence or nationality. One way of understanding domicile is as a more “emotional” concept of a person’s permanent home.
There are four types of domicile. The first three types of domicile are defined under the general common law, and the fourth type of domicile is determined under statute:
- Domicile of origin: you acquire this domicile at birth, in most cases (but not always) from your father.
- Domicile of dependency: you acquire this domicile if your parent (who determined your domicile of origin) acquires a new domicile whilst you are under the age of 16.
- Domicile of choice: You may acquire this domicile once you have attained the age of legal capacity. Acquiring a domicile of choice involves both an “objective element”: looking at all the facts, which country do you inhabit; and a “subjective element”: in which country have you decided to reside permanently or for an indefinite period of time. You may be domiciled in a country if you live there without any intention of leaving it, even if you envisage the possibility of returning to your native country someday. Conversely, if you intend to return to your native country at some definable and plausible point (for example, on retirement), then you may remain domiciled there even if you live somewhere else for many years. If you lose a domicile of choice then your domicile of origin revives, unless and until you obtain a new domicile of choice.
- Deemed domicile: deemed domicile is determined by statute. Regardless of your domicile under common law, you are automatically treated as domiciled in the UK for tax purposes if you have been tax resident here for more than 15 out of the previous 20 tax years.
The above is an oversimplification and various peculiarities have arisen as the law has evolved over time. For example, for marriages predating 1 January 1974 the wife takes on the domicile of her husband, meaning she could lose her UK domicile if her husband was not domiciled (and vice-versa). Further, situations can arise for particularly mobile families in which your domicile of origin is from a country you have never lived in, but as you have not formed the intention to remain anywhere else permanently or indefinitely, you have retained this domicile into adulthood. Therefore what can at first appear to be a straightforward domicile position can, on further enquiry, turn out to be quite complex.
It is also important to be aware that domicile must relate to a jurisdiction that has its own legal system. Therefore, if someone is referred to as being “UK domiciled”, they must be domiciled in one of the three legal jurisdictions within the UK, that is England & Wales, Scotland or Northern Ireland. Similarly, in federal countries such as the United States of America and Switzerland, domicile relates to individual states.
Effect of an individual’s domicile status
Domicile and tax
Your domicile status is critical to how you are taxed, particularly in relation to assets located outside the UK. For example:
- Inheritance Tax: if you are not domiciled in the UK then any assets situated outside of the country should not be subject to UK Inheritance Tax. This can be very significant, as the UK imposes Inheritance Tax at a rate of 40% on the value of a deceased’s worldwide estate exceeding a tax-free “nil-rate band”. Inheritance Tax can also apply during a person’s lifetime, for example if assets are transferred to a Trust. Although gifts to spouses – during lifetime and on death – can be free from Inheritance Tax, this is not the case if the deceased is UK domiciled and the surviving spouse is not.
- Tax treaties with other countries: The UK has treaties with a numerous other countries and in some cases one’s domicile can have a bearing on which country has priority taxing rights. Some tax treaties provide particularly favourable provisions, such as the UK’s tax treaties with India and Pakistan. The Indian treaty, for instance, provides that a person who dies with an Indian domicile will not be subject to UK Inheritance Tax on assets situated outside the UK - even if he or she is deemed domiciled in the UK - provided that such assets do not pass under a disposition regulated by the laws of the UK (such as an English Will).
- Income Tax and Capital Gains Tax: if you are not domiciled or deemed domiciled in the UK then you can claim the “remittance basis of taxation”. Broadly, this exempts you from paying Income Tax and Capital Gains Tax on income and gains arising outside the UK, provided such income and gains (or anything deriving from them) are not used in the UK. This can be very advantageous, as otherwise UK residents must report and (subject to any credit for foreign taxes) pay tax on their worldwide income and gains.
- Trusts: if you are not domiciled or deemed domiciled in the UK, you can transfer non-UK assets to a Trust and, provided it is set up and managed in the right way, such assets will be sheltered from Inheritance Tax and (with some exceptions) Income Tax and Capital Gains Tax. This protection will continue even if you become deemed domiciled in the UK, when you will no longer qualify for the remittance basis and would otherwise be subject to tax on your worldwide assets. Your residence and domicile status when you fund the Trust will be key to securing this beneficial tax treatment, so obtaining good advice is key. It is also important to note that there will likely be tax charges on UK resident beneficiaries who receive distributions from a Trust, so they are usually used to “roll-up” income and gains rather than to fund UK living.
Domicile and succession law
Your common law domicile status (but not your deemed domicile status) is key to determining the succession of your assets located in the UK, other than real estate. In simple terms, the English Courts will apply the laws of succession of your country of domicile to your moveable assets. This is worth bearing in mind if, for example, you are domiciled in a country which prescribes who inherits your estate (known as “forced heirship”).
On a related point, if you have assets in an EU member state which provides for forced heirship, you may be able to elect for English succession law to apply to those assets - with the freedom of testamentary disposition this entails - on the basis that you are “habitually resident” in the UK, or on the basis that you are a UK national. Whilst this may enable you to avoid forced heirship, however, HMRC may consider it a factor indicating that you are domiciled in England
Domicile enquiries
Due to the tax advantages associated with being non-domiciled, HMRC is increasingly investigating taxpayers who claim this status in their self-assessment tax returns. HMRC will do so by opening a “domicile enquiry”.
Domicile enquiries are characterised by extensive questions regarding the taxpayer’s history and circumstances, together with requests for supporting documentation. Enquiries can entail prolonged rounds of correspondence with HMRC, as each answer can lead to further, more detailed questions.
Having legal representation in a domicile enquiry is vital, as your approach to answering HMRC’s questions can be key to determining the length and eventual outcome of the enquiry. For example, HMRC may ask you wide ranging, irrelevant or inappropriate questions as well as multiple questions on the same point framed in slightly different ways, in an attempt to catch you out. Poorly considered answers may prolong the enquiry, undermine your claim to be non-domiciled, and in the worst-case scenario, cause HMRC to broaden the scope of its investigation to other aspects of your tax affairs. You can legitimately refuse a request for information or documentation which HMRC does not “reasonably require” in order to check you status, so it is always important to consider the legal basis of HMRC’s requests.
If the outcome of a domicile enquiry is a determination that you are domiciled in the UK, the results can be potentially catastrophic. As well as being subject to Inheritance Tax on your worldwide estate, you could face immediate and ongoing Inheritance Tax charges in relation to any Trusts you have settled, Income Tax and Capital Gains Tax on such Trusts and a withdrawal of the remittance basis of taxation, with the Income Tax and Capital Gains Tax consequences this entails. Such treatment can result in substantial historic tax liabilities if HMRC determine that your domicile changed at some point in the past.
With the above in mind, if you want to make use of any of the tax planning available to non-domiciliaries, you should be certain of your status and have everything in place to support your filing position if HMRC were ever to open an enquiry.
Immigration
Care needs to be taken by non-UK domiciled individuals who want to apply for UK citizenship. The Home Office has suggested that if an individual renounces their previous citizenship, it may also suggest a change in their domicile. Further, certain routes to citizenship require the applicant to confirm that their “principal home” or “main home” is in the UK. This is distinct from, but related to, the “permanent home” requirement for UK domicile. It should be noted that the Home Office cannot change tax law, however some commentators have suggested that an application for British citizenship may be incompatible with non-domiciled status. We are of the view that this is not necessarily the case, however it may be used against you in any argument that you are non-UK domiciled, and care should be taken with the application that statements are not made which contradict non-domicile status.
How will the potential changes to the domicile regime affect me?
At this stage, we do not know what the position will be in the coming years. Although Labour have pledged to scrap the regime, they have not given any indication of what, if anything, will replace it – other than to suggest that there will be some relief for “short-term” visitors to the UK (figures of between 2 and 5 years have variously been suggested). However, while there are dangers in speculating, it might be reasonable to assume that any new regime:
- is unlikely to be retrospective, meaning that untaxed income and gains from past years are unlikely to face automatic taxation (but, as now, would be if remitted to the UK in a later year);
- will need to have different rules for inheritance tax than for income tax and capital gains tax. While one can see the logic in charging annual taxes (income tax and CGT) on those who are resident here, the case for taking 40% of the worldwide assets of a person newly arrived in the UK is much weaker;
- similarly, would need special rules for trusts – defining what degree of connection to the UK a trust needs before it faces UK tax. For instance, a trust set up by someone with no connections to the UK, and of which the majority of beneficiaries are outside the UK, would seem unlikely to face the full rigour of any changes simply because one discretionary beneficiary happened to be in the UK for a relatively brief period;
- will need transitional rules to deal with existing structures and unremitted income and gains;
- might contain some incentives to bring past income and gains into the UK;
- will hopefully be the result of proper consultation – which realistically is likely to take at least one and ideally two years.
Similarly, the Conservatives have given no confirmation as to whether they will make any changes.
This uncertainty is unsettling for many, and is understandably making people anxious about moving to the UK, staying in the UK or investing here. One can only assume (or at least hope) that any Government will recognise the value that foreign individuals bring to the UK: supporting those wanting to come to the UK to invest in our economy, employ our workers, establish businesses here and add to the diverse society from which we all benefit in the UK.
Until we have any clarity as to the potential changes, we would not generally recommend taking any steps based on pure speculation. In some circumstances, it may be sensible to put in place any planning sooner rather than later, with the hope that any changes will have not have retroactive effect and structures already in place will retain a level of protection.
Otherwise, watch this space and be ready to act as soon as further information is available.
How can we help?
We have extensive experience in advising on domicile and assisting clients with domicile enquiries.
If you are considering claiming non-domiciled status, we can:
a) provide you with a detailed Legal Opinion confirming your domicile status;
b) advise you on what documentation you should retain to support a claim to be domiciled outside of the UK; and
c) help you prepare a “domicile statement”, a signed and dated note setting out your background, current circumstances and future intentions, which will help you in the event of a domicile enquiry. It is important that domicile statements are reviewed regularly and kept up to date.
If you are a non-UK domiciled individual living in the UK or considering relocation to the UK and wish to discuss whether you should take any steps now ahead of any potential legal changes, we can review your position and provide relevant advice.
If you are subject to a domicile enquiry, we can advise you on your position, liaise with HMRC on your behalf, represent you in meetings and, if necessary, appeal an adverse decision.
Whether you are domiciled in the UK or not, we can also help you with all other aspects of your UK tax and succession planning.
Written by Helen MacLeod.