With Christmas just around the corner, many people’s minds will be turning to Christmas dinner with the family, and perhaps the presents they may receive. But, unlike some of those presents, a person’s domicile position isn’t just for Christmas – it usually stays with you for life.
It goes without saying that family is super important to everyone on so many levels. It usually drives decisions on where someone chooses to live, perhaps leading to an overseas relocation to keep their family close. Your family (usually your father) will also impact what domicile you are born with and even if you are out of the UK for many years, it doesn’t necessarily mean you will lose your original UK domicile, which can lead to unexpected UK tax liabilities.
Some may also have relocated to the UK from overseas and lived here for several years, perhaps thinking overseas income and assets are excluded from UK tax because it all remains overseas, and they believe they continue to be non-UK domiciled. But is that perceived overseas domicile correct? We would always recommend a bespoke review of an individual’s position, simply because it can (and does) change in certain circumstances.
This Christmas, when you are sitting down with your family to enjoy a traditional festive lunch, it might be good to start a conversation about your family history. This is the time of year when all generations come together and is a perfect opportunity to really find out more about family origins and any historic global relocations. In some cases, this could lead to some potential UK tax savings across the whole family, perhaps leading to an unexpected Christmas tax present.
Why does Domicile matter for UK tax purposes?
Income and Capital Gains Tax
Individuals residing in the UK are subject to tax on their worldwide income and gains. However, those who are resident, but not domiciled in the UK, can access the ‘remittance basis of taxation’. This allows overseas income and gains to be sheltered from UK taxation, provided they are not ‘brought to or enjoyed’ in the UK. It can lead to significant tax savings, particularly for those who have multiple assets overseas and do not necessarily require monies to be paid into the UK.
For those with more than £2,000 unremitted overseas income or gains, this remittance basis of taxation can be claimed without any additional charge for the first seven years of UK tax residence, but thereafter an annual charge must be paid of £30,000 to claim this basis of assessment. After 12 years of residence this charge increases to £60,000. Finally, after 15 years of residence, the remittance basis can no longer be claimed and an individual would then be ‘deemed’ UK domiciled (deeming provisions outlined below) and taxed on income and gains as they arise.
Those who are deemed to be UK domiciled are subject to UK Inheritance Tax on their worldwide assets on death, and are also limited to the amounts they may gift into a Trust every 7 years. Individuals who are non-UK domiciled are only subject to UK Inheritance Tax on their UK-situs assets on death, and the limit on gifts into Trust only apply to UK-situs assets.
As such, individuals who are not UK domiciled can often take advantage of significant tax savings if their financial affairs are structured effectively.
So What is Domicile?
Domicile is a common law term which can broadly be defined as the country that a person considers as their permanent home. Note that this is completely separate from tax residence, which instead follows physical days of presence in any jurisdiction.
Everyone acquires a ‘domicile of origin’ at birth, which is generally the domicile of their father at that time. The exceptions to this are where the child’s parents are unmarried when they were born, or where the child’s mother was widowed before they were born – in which case the domicile of origin is determined by the mother’s domicile. The position can differ slightly in Scotland following the introduction of The Family Law (Scotland) Act 2006.
Domicile of origin
This is never lost (other than by adoption), but can be temporarily suspended where an individual acquires a ‘domicile of dependence’ or a ‘domicile of choice’.
Domicile of dependence
This can arise for those who lack capacity and have dependence on another person – generally children and individuals of any age who lack sufficient mental capacity. In such cases, their domicile follows that of the person they are dependent upon. Once again, the position can differ in Scotland.
Domicile of choice
Choosing your domicile is not as simple as the name suggests. It is limited to where an individual resides within a territory and intends to reside their indefinitely or permanently.
Permanent tax residence in the other country, alongside a clear intention to remain there with associated evidence, is fundamental to how domicile would be determined by HMRC, in the event of any enquiry. Such evidence is multifaceted, i.e. there is no one factor that HMRC will look for, rather an overview of personal and financial connections and circumstances.
An important point is that any domicile of choice is lost when an individual ceases to both reside and intend to reside in that territory. This means that someone who previously had a UK domicile of origin, who later acquires a domicile of choice, will automatically reacquire their UK domicile of origin if they choose to come back to the UK and resume UK tax residence.
With effect from April 2017, new provisions came in which can deem an individual to be UK domiciled if either of the following scenarios apply:-
- The individual was born in the UK, has a UK domicile of origin, and has been resident in the UK on or after 6 April 2017.
- The individual has been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year.
Since the introduction of these rules, tax planning for those coming to live in the UK has never been more important.
An individual’s domicile can be complex to assess and is certainly something HMRC may look to challenge if there is any ambiguity – and particularly where significant sums of tax may be at stake. Documentary evidence is always key in responding to an HMRC enquiry on domicile, and so establishing details of the family history and documenting this in writing can go a long way to supporting any assertions made in relation to an individual’s domicile.
Similarly, the acquisition of a domicile of choice can be even more difficult to prove, with no one factor being conclusive and the burden of proof resting with the taxpayer. Documentary and practical evidence of the intention to reside indefinitely or permanently in a territory should always be retained.
Reviewing a domicile position and using this to structure your financial affairs tax-efficiently is a highly complex and specialist area, and the importance of appointing a suitably experienced tax adviser to assist you in this regard cannot be understated – the tax exposure if it goes wrong can often be significant.
If you would like to discuss your domicile and how this may impact your tax planning strategy, please get in touch with Lynn Gracie, Tom Andrew, or your usual AAB Group contact.