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How to determine and defend domicile

Changes to UK domicile rules tightened the conditions for claiming tax advantages. For those claiming non-domicile status, evidence is crucial.


In brief
  • Non-domiciles can benefit from favourable tax treatment in the UK, but HMRC is increasingly scrutinising their claims.
  • Evidence of links abroad and intention to leave the UK is essential to defending challenges to non-domicile status.
  • The challenge may even come after death, so families must be prepared. 

Changes to the UK deemed domicile provisions from April 2017 make it critical for individuals to understand how domicile is determined and, importantly, how it impacts their personal UK tax position. A key point to understand upfront is that the common law concept of domicile is completely distinct from residence.

An individual must have a domicile but can only have one country of domicile at a time. By contrast, it is perfectly possible to be considered a resident of more than one country in a tax year or indeed a resident of no country. An individual’s domicile may change over time, and there can be complexities in determining it, particularly where individuals move from their country of birth and their children are subsequently born and living elsewhere. 

 

Domicile of origin, choice and dependency

There are three distinct types of domicile recognised under UK common law. The simplest is domicile of origin, which is acquired at birth and is that of the child’s father (where the parents were married), and of the child’s mother (where they were not).

 

Second is domicile of choice, which an individual may establish in an alternative country. This relies partly on establishing residence in the chosen nation. However, it is more important to demonstrate over time the intention to remain there indefinitely, in part by severing ties to the origin country.

 

It can be difficult to establish a domicile of choice and lose a domicile of origin. Nevertheless, individuals living in the UK for many years may be treated as acquiring a UK domicile of choice without express intent. This is particularly likely where they have established strong links and significant family ties to the UK and lost connection with their country of origin. This inadvertent acquisition of a UK domicile of choice is the most common argument put forward by HMRC if it makes enquiries.

 

Finally, there is domicile of dependency. A minor under 16 years of age acquires the domicile of their father or mother (under the domicile of origin rules). If their father’s domicile of origin is displaced with a domicile of choice before the child is 16, however, the child’s domicile also changes.

 

To take a practical example, a child is born to married parents with a German domicile of origin will also have German domicile. If the father moves to Canada before the child is 16, but returns to Germany within a few years, both are likely to retain a German domicile. However, if the father asserts a domicile of choice in Canada, the child acquires a domicile of dependency there. This replaces his German domicile of origin.

New types of domicile for UK Taxation

Under UK domestic law, someone born in the UK will be domiciled in either England and Wales, Scotland or Northern Ireland. All are viewed in the same way for UK tax purposes, and individuals are therefore UK domiciled. Those domiciled and resident in the UK are taxed there on their worldwide income and gains on an arising basis, regardless of whether the income or gains are brought into the UK. The worldwide assets of UK-domiciled individuals are also subject to UK inheritance tax.

Many individuals living in the UK, however, have a foreign domicile in law. These non-UK domiciled individuals, or ‘non-doms’, can limit exposure to UK tax by choosing to use a remittance basis to calculate their liability. 

Consequently, UK tax authorities are increasingly looking to ensure that those who claim to be non-UK domiciled are indeed so. In line with this, the April 2017 changes to the UK tax legislation introduced two further types of domicile: Deemed UK domicile (over and above the previous rules applicable for inheritance tax only) and formerly domiciled resident.

The two new domicile types do not displace either a domicile of origin or of choice, but they do change the treatment of the individual for UK tax purposes:

  • Deemed UK domicile status is given to those who can demonstrate they are not UK domiciled, but have been resident in the UK for 15 of the last 20 UK tax years. Use of the remittance basis is no longer available to these individuals. Consequently, their worldwide income and gains are taxable on an arising basis, and their worldwide estate is within the scope of inheritance tax. Breaking deemed domicile status requires leaving the UK for at least six full tax years (income tax and capital gains tax) if someone intends to return to the UK. If they do not, they must leave for at least three complete tax years for inheritance tax purposes.
  • Formerly domiciled resident status is for those with a UK domicile of origin who have subsequently left the UK to settle in another country. They will be treated as temporarily reviving their UK domicile of origin for UK tax purposes if they become UK resident again after 5 April 2017 until they leave the UK again. UK domicile of origin is revived immediately for income and gains purposes, and from the start of the second tax year of residence for inheritance tax purposes.

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    Domicile enquiries

    Due to the difference it can make, it’s vital that domicile is fully understood by those making a claim to be domiciled outside the UK and filing their UK tax returns on that basis. It is usually advantageous from a UK tax perspective and, as a result, HMRC is increasingly scrutinising the income and inheritance tax returns of those claiming a non-UK domicile. That’s particularly so for those who are resident in the UK for many years, or are of an age where it appears unlikely that they will ultimately return to another country.

     

    This is also important in the context of other potential benefits introduced for some non-doms in the April 2017 legislation changes. These include rebasing and cleansing reliefs, as well as trust protections for those who settled trusts prior to becoming deemed UK domiciled.

     

    These reliefs are potentially extremely valuable. The mixed fund cleansing opportunity ended in April 2019. In the case of rebasing, though, it may be many years before an asset is sold. At the sale date, the individual will need to continue to be non-UK domiciled under common law to benefit, however, a successful challenge by HMRC to the domicile of an individual who has claimed either mixed fund cleansing or rebasing will render these reliefs ineffective. The result can be a significant increase in the individual’s tax liability.

     

    Trust protections can provide an ongoing benefit for many years, but again, there is reliance on the fact that a UK domicile of choice has not been acquired by the settlor. If HMRC asserts that a domicile of choice was obtained prior to setting up the trust, inheritance tax may be payable. Similarly, if at any time whilst the trust is in existence, the settlor loses their non-dom status, its protections (under the income and capital gains tax rules) are lost. The settlor may then be taxable on all income and gains arising at trust level.

     

    Mitigating the risk

    The burden of proof rests with HMRC if it doubts an individual’s non-dom claim, but domicile enquiries can be lengthy and intrusive. They can involve months or even years of correspondence with HMRC, with numerous questions into background, lifestyle and family and social connections, both from a historic perspective and to establish future intentions.

     

    For those claiming non-dom status, acquiring and maintaining evidence of strong, ongoing links to the country of domicile is essential, and so is evidence of an intention to leave the UK at a future date. It may be worth considering having a domicile statement prepared to provide contemporaneous evidence supporting the claim.

     

    Finally, domicile may also be challenged on death, potentially bringing a foreign estate within scope of UK inheritance tax. Again, evidence of the intentions of the individual to leave the UK, supported by the necessary planning to achieve this, will be required by family members, executors and other relevant contacts. This sort of challenge could delay the distribution of the estate.

     

    Those claiming non-dom status should share any evidence of intentions with family members or others who may find themselves defending a domicile challenge. Provisions included in a will can also be taken into account by HMRC, so it is essential that the will is consistent with any claim to non-domicile status.

    Summary

    The benefits of non-domicile status for those living in the UK can be substantial, but changes in 2017 have tightened requirements around claiming the tax advantages. Enquiries from HMRC can be extensive, so ‘non-doms’ should ensure they have strong evidence to support their claims.

    Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Neither Ernst & Young LLP nor EY Private Client Services Limited accepts responsibility for any loss arising from any action taken or not taken by anyone using this material. If you require any further information or explanations, or specific advice, please contact us and we will be happy to discuss matters further.

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