An individual’s country of tax residence will normally change when they move to another country. Sometimes, an individual might find themselves resident in two or more countries if they spend enough time in those countries in a tax year, and meet the tax residence criteria for those countries.
Domicile has a very different meaning to residence. It refers to an individual’s place of permanent belonging, i.e. where their ‘roots’ are. It is a general legal concept and does not mean the same thing as nationality (though it is often linked to it). Importantly, unlike residence, or nationality, an individual can only have one domicile at a time. Simply moving to another country does not change an individual’s domicile. It is something that ‘sticks’. Still, though, it is possible for it to change.
Domicile is important because it can play a role in how an individual’s non-UK income and gains are taxed while they are resident in the UK. Domicile also plays a role in what happens to an individual’s assets when they die.
What is my Domicile?
UK law recognises three different types of domicile
Domicile of origin:
if the individual’s parents are married it is the domicile of the individual’s father, otherwise it is the domicile of the mother.
Domicile of dependency:
If the individual’s father changed their domicile before the individual was 16, the individual’s domicile would follow that to which their father changed (or the mother’s, if unmarried). For example, suppose a child was born in Spain to parents domiciled in Spain. The family then all moved to the US when the individual was 5 years old. The parents make a decision a few years later that they will remain permanently in the US, thereby forming a domicile of choice in the US. Accordingly, the child will have a domicile of dependency in the US. This US domicile of dependency will replace the original Spanish domicile of origin.
Domicile of Choice:
An individual can override their domicile of origin and dependency if they form a domicile of choice in another country. This isn’t achieved simply by becoming resident in a new country. Instead, to establish a domicile of choice in an alternative country means demonstrating an intention to remain there for good and, to some substantial extent, breaking ties with their country of origin/dependency.
Have I acquired a domicile of choice in the UK?
Individuals who came to live in the UK many years ago, and are still resident in the UK, may wonder whether they have established a domicile of choice in the UK. Although a grey area, many advisors will suggest that if a person has not decided that the UK will be their home forever, then they will not have established a domicile of choice in the UK. However, if it is their intention to remain here permanently, and they have lost their ties to the country forming their domicile of origin/dependency, then they have likely established a domicile of choice in the UK.
Ulrich has a domicile of origin in Germany. He grew up in Germany, and his close relatives continue to live there. He has been living in the UK for the last five years as a result of finding an employment in the UK. In that time, Ulrich has married a UK domiciled individual, and lives in a home they bought in the UK.
Where is Ulrich domiciled?
Ulrich should consider his future intentions. He identifies that he is not sure whether he and his wife will stay in the UK forever, or return to Germany, or move to another country altogether. In this case, there are good grounds to support Ulrich’s permanent place of belonging still being Germany, and that therefore he continues to be domiciled there rather than the UK.
Being not domiciled in the UK (i.e. being a ‘non-dom’) can be tax advantageous. Consequently, HMRC may enquire into income tax returns and inheritance tax returns where this claim has been made, in order to confirm the reasons why the individual’s domicile status has been claimed.
Deemed Domiciled in UK
From April 2017, any individuals who are domiciled outside the UK, but have been UK resident for 15 out of the last 20 tax years, become deemed domiciled in the UK for tax purposes. The result of this is that such individuals are treated similarly to UK domiciled individuals with respect to how they are taxed. Those who are affected will become subject to tax on their worldwide income and capital gains tax, since they are no longer able to use the remittance basis of taxation. Furthermore, their worldwide assets come into the scope of inheritance tax on death.
There will sometimes be instances where an individual will be deemed domicile in the UK for inheritance tax, but not for income tax and capital gains tax. This will occur where an individual becomes deemed domiciled in the UK under the 15 out of 20 years rule, but then leaves the UK and becomes non-resident. In this case, the individual will stay deemed domiciled in the UK for the next three years for inheritance tax purposes.
Separately, from April 2017, where an individual was born in the UK to UK domiciled parents, and that individual is now UK resident, they will be deemed to be domiciled in the UK.