How to determine and defend domicile

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.

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.