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Domicile and UK Tax

Domicile and UK Tax

Domicile is not the same as nationality or residence. Questions of domicile can be complex but broadly speaking you have your domicile in the country that is your ‘real’ or permanent home.

You cannot be without a domicile, and you can only have one domicile at a time.

There are three types of domicile:

  • domicile of origin

  • domicile of choice

  • domicile of dependence (applicable to children)

Domicile of Origin

Everyone acquires a domicile of origin at birth.

If a child’s parents were married when he was born then his domicile of origin is the same as his father’s domicile at the time of his birth. If a child’s parents were not married when he was born, or if his mother was widowed before his birth, then his domicile of origin is the same as his mother’s domicile at the time of his birth.

It follows that an individual’s domicile of origin will, in virtually every case, depend on the domicile of one of the individual’s parents. This parental domicile might have to be demonstrated by evidence. In some cases the process of establishing an individual’s domicile will require the examination of the domicile of earlier generations of his or her family.

Your domicile of origin will continue until you acquire a new domicile – therefore if you have a domicile of origin outside the UK, then this is likely to still apply unless you intend to remain in the UK permanently or indefinitely.

Domicile of choice

After the age of 16 (earlier in Scotland), you can change your domicile. To do this you will need to settle permanently in a country other than your previous country of domicile.

If you change your domicile you have a ‘domicile of choice’.

Acquisition of domicile of choice

A change of domicile is never to be lightly inferred, particularly a change from a domicile of origin to a domicile of choice, which is regarded by the courts as a serious step requiring clear and unequivocal evidence.

The standard of proof in this area is the civil one, on the balance of probabilities, but discharging it requires suitably cogent and convincing evidence.

A domicile of choice is an inference that the law makes from the facts. A domicile of choice can only be acquired where an individual is both:

  • resident within a territory subject to a distinctive legal system or ‘municipal law’ (refer to RDRM22310) and

  • intends to reside there indefinitely (refer to RDRM22320)

Intention to Reside Indefinitely – HMRC Guidelines

The requisite intention involves the contemplation of an unlimited period of residence. In this context ‘unlimited’ corresponds to ‘indefinite’.

The intention is a present one, which might be past or present relative to the enquiry. In some cases the relevant ‘present’ could be around the time that the individual acquired legal capacity.

A wide range of evidence has to be examined in evaluating intention. No single act or circumstance is determinative; all facts, including apparently trivial ones, have to be considered. Factors vary in significance in different areas and within the factual context of any given case.

Intention does not depend on the individual’s wishes in respect of his or her domicile; it is not an intention to acquire a domicile but the intention to reside in a particular territory indefinitely.

An important aspect of the existence, or otherwise, of the necessary intention is whether or not there is a contingency upon the occurrence of which the individual’s residence in a particular territory is anticipated to end. If there is an intention to return to the domicile of origin on a clearly foreseen and reasonably anticipated contingency, there is no intention to remain indefinitely. However, if the contingency is vague or sufficiently conditional, an intention to remain indefinitely could exist and a domicile of choice be acquired.

Statements of Intention

Statements of intention have to be considered in the context of all the evidence relevant to establishing an individual’s intentions. Mere statements are generally less important than actual conduct and may carry little weight if the statement does not correlate with actions taken. An individual might genuinely believe he or she is domiciled in a particular territory, but objective analysis of the facts could prove that belief to be wrong.

An individual’s motives should also be borne in mind when evaluating his or her statements relating to other relevant matters. Motives, such as avoidance of family or creditors, or tax mitigation or avoidance, can shed light on intended permanence.

A declaration of domicile may be disregarded if there is evidence that the declarant did not understand the relevant law and what their statement meant. This is not to say that evidential statements are to be ignored, merely that an explicit declaration, especially if it uses the term ‘domicile’ or is deliberately made about a person’s domicile, is only to be given weight where the individual making it can show that he or she understood the relevant law at the time the statement was made.

Loss of domicile of choice

Loss of a domicile of choice requires cessation of both residence and intention.

The laws of the UK employ the doctrine of the revival of the domicile of origin in situations where a domicile of choice has been abandoned without the acquisition of another domicile of choice.

Other countries do not use this approach, preferring to treat a domicile of choice as continuing until displaced by a new one.

Suggested Actions to Move Domicile From UK To Australia (for example)

You need a permanent visa to be able to think about switching domicile. Every case is different, but your actions should include the following:

  • become an Australian citizen as soon as eligible

  • purchase property in Australia for your residence

  • make arrangements for your funeral to be held in Australia, or at least specify Australian burial/cremation.

  • move as many of your assets and investments to Australia as possible

  • allow your British passport to lapse once you are an Australian citizen (you can get a new one later on if you change your mind)

  • ensure that your Australian connections are, in so far as possible, with the same state in which you establish residence.

  • do not register as an overseas elector in the UK (although technically, it should be ignored if you do). Exercise the right to vote in Australia.

  • do not make frequent, long visits to the UK

  • do not keep a property in the UK for your own use (as opposed to a rental property, although it is better if all UK property is sold).

  • obtain a foreign driving licence to replace your UK licence

  • join clubs in Australia and resign from them in the UK

  • close unnecessary UK bank accounts

The above list is not exhaustive nor are all 100% required.

Be aware though, that if you establish a “domicile of choice” of Singapore, lets say, and then move to Australia, your domicile of origin instantly snaps back into place. You would then need to build up a new case for acquiring a domicile of choice of Australia.

However, since there is a high probability of you returning to live in the UK, even if you managed to acquire a “domicile of choice” of somewhere overseas, your UK domicile will revert when you move back to the UK.

deemed domicile

If non-UK domiciled as a consequence of the common law as described above, you may become ‘Deemed Domiciled’ in the UK by virtue of spending 15 of the last 20 years as a resident of the UK. For these purposes, split tax years (see the section on tax residence) count towards the 15 year total.

For those who began life with a domicile of origin of the UK, the deemed domicile rule is far more fast-acting. If you are become UK resident you immediately become deemed domiciled regardless of any domicile of choice acquired as described further above.

Once deemed domiciled, you are treated for all tax purposes as if you are UK domiciled. This affects UK Inheritance Tax, Income tax and CGT treatment. However, losing deemed domicile is more clear cut than changing domicile under common law, and is achieved by leaving the country and subsequently failing to satisfy the 15 out of 20 rule above.

UK domicile election

An individual may make an election to be treated as UK domiciled. This is likely to be desirable only if you are a non-UK domiciled spouse inheriting assets from a UK domiciled spouse, as they could subsequently receive the assets tax free instead of paying 40% IHT.

The application must be made in writing to HMRC. Once the election is made, due to the spousal exemption (s18 of the IHTA 1984), all assets can be passed to you without any Inheritance Tax charge.

Once you have been non tax-resident in the UK for 4 complete tax years after the date on which you make the election, you will cease to be UK domiciled for Inheritance Tax Purposes and so will be liable for UK Inheritance Tax only on your UK situated assets (see s6 of IHTA 1984 below). Note that the election can be made by someone who has never been UK resident.

This election is a very powerful, under-used and under-discussed tool for people in your situation, in which one spouse if non-UK domiciled. The tool is especially powerful if a) the non-domiciled spouse if the younger of the two (as they are then likely to survive the requisite 4 years) and b) the non-domiciled spouse will not live in the UK post-election (as the 4 year clock can begin ticking immediately)

Inheritance Tax and Domicile

Why does all of the above discussion on Domicile matter?

Generally, if you are domiciled, or deemed to be domiciled, in the UK at the time of your death, inheritance tax applies to your assets wherever they are situated.

If you are domiciled abroad, inheritance tax applies only to your UK assets.

Nil Rate Band

Each person enjoys an Inheritance Tax Nil Rate Band of £325,000.

Ignoring for now the effect of certain types of trusts, this enables a person, wherever domiciled, to gift £325,000 worth of otherwise taxable assets free of tax.

Gifts made during the last 7 years of death can be taken into account when establishing how much of this NRB has been used (for brevity, detail on this is omitted for now, but is available on request).

Gifts made more than 7 years before death are free of IHT.

If you do not use your NRB on death (for example, if you pass all assets to a UK domiciled spouse), you may pass your unused NRB to your spouse.

Residence Nil Rate Band

Each person can also enjoy an additional NRB of up to £175,000 if they pass otherwise taxable UK residential property to a direct descendent. Again, this may be transferred to your spouse if unused.

Note that those with estates of more than £2.35m on death are not given any Residence Nil Rate Band

Spouses

Transfers on death from one UK domiciled spouse to another are made free of Inheritance Tax. This exemption does not use up the Nil Rate Band, and so up to £325,000 left to other people can also be free of tax (or £ 500,000 if using the Residence NRB).

Transfers on death from a UK domiciled spouse to a non-UK domiciled spouse do not enjoy the same complete exemption from Inheritance Tax. In such a circumstance, the non-UK domiciled spouse may receive £650,000 free of IHT, with everything else, wherever located, being taxed at 40%. This is because each spouse has their own £325,000 NRB, both of which may be used on the death of the UK domiciled spouse.

Transfers from a non-UK domiciled spouse to a UK domiciled spouse are made free of Inheritance Tax (as HMRC is hapy that assets which would otherwise never generate them Inheritance Tax now will when the UK domiciled spouse passes away)

Trusts

Placing assets into trust during your lifetime is one way that IHT on death can be mitigated, whilst still enabling you to exert some control over the assets (rather than simply giving them away).

The tax treatment of assets passed into trust can be complex, and will not be covered in detail herein. This said, should my recommendations entail the use, or possible use, of trusts then this tax treatment will be covered in full separately. Some brief discussion on trusts is further below.

Income and Capital Gains Tax and Domicile

In general, domicile is relevant when discussion Inheritance Tax whilst tax residence is relevant when discussing Income Tax and Capital Gains tax.

That said, being non-UK domiciled enables a UK resident to elect (via their self-assessment) to be treated differently for tax purposes in relation to overseas (non-UK) income and gains.

A non-UK domiciled, but UK tax-resident, individual may elect to be taxed on a ‘Remittance Basis’ on such overseas income and gains, meaning that they are only taxed if said income or gains are remitted to the UK. Income or gains are remitted to the UK if they are sent there, or are used to pay for goods or services received/provided in the UK.

For clarity, note that other than the above capability, those tax-resident in the UK are taxable on their worldwide income and gains. Those non tax-resident are taxable only on their UK sourced income and gains.

Inheritance Tax Mitigation

There are a few steps you can consider to mitigate your inheritance tax liability.

Life Insurance

If you have a potential inheritance tax liability one option is to arrange a life insurance contract on yourself that, on death will pay out a sum of money to the children, or beneficiaries, that will be sufficient to pay the inheritance tax bill. This, and all life insurance, should be written into trust, or owned by your spouse, to ensure it falls outside of your estate for inheritance tax purposes.

Gifting away your wealth.

You can “gift” your wealth away by using a “potentially exempt transfer” (PET). Mostly this is used to get rid of sizeable assets that make up large chunks of an estate, such as property. Over a 7 year period the asset passes out of your estate. For this to work, in the eyes of the Inland Revenue, it must be a complete transfer of the asset and you cannot retain any benefit from it. For example, if you gifted a property and continued to live in it rent free the Inland Revenue would consider this a gift with reservations and disallow it. If you were to chose this option you would need a tenancy agreement and pay a fair market rent. However, this is simply shunting the problem down one generation, and possibly making it worse.

In your situation, in which your spouse is not UK domiciled, one of the easiest and most effective ways to mitigate your future tax bill on death will be to allow your assets to accumulate in the name of Janice instead of yourself. Even owning jointly instead of in sole names helps, as for IHT purposes you are assumed to own only 50% of an assets value if jointly owned. For this reason, my suggestion would be that, for IHT efficiency, any investment platform that we set up for you, or that you set up yourself, is actually held in Janice’s name and not your own (Singapore imposes no Inheritance Tax). It would also make sense to transfer your existing investments, wherever possible, into her name (these would amount to a PET, and will be free of IHT if you survive 7 years from the date of transfer)

Changing your country of domicile

If you do not intend to retire to the UK and plan to spend the rest of your life in, say Singapore for example, you may acquire a “domicile of choice” and this will replace your “domicile of origin”. To do this your executor must be able to convince the UK inland revenue that you really had no intention of returning to the UK, other than for the occasional visit. So, ideally, you would have a home in Singapore, most of your wealth here, become a PR, have a will here and express that you wish to be buried here.

Trusts

Though the use of trusts to legally escape tax has been greatly curtailed by recent governments, some fantastic IHT planning used of trusts still do exist. You are most likely to have cost-effective use of such trusts if investing via an insurance provider, as they tend to be the industry leaders in crafting such trusts and also liaising with HMRC to ensure compliance. Merely as examples for now (we can get into details as required later), these trust include:

Excluded Property Trust – These enable someone who is currently non-UK domiciled to place assets therein. If that person subsequently becomes UK domiciled the assets placed into the trust remain outside of the UK Inheritance Tax net (as the settlement into the trust was carried out by a non-domiciled individual)

Loan trust – Eliminate any IHT on any growth on the amount gifted into the trust. For example, should you invest a total of $1m into a bond and in 30 years time, whilst drawing your tax deferred allowance, transfer the bond into a loan trust, the value at that time remains in your estate, but all subsequent growth accumulates outside of your estate. You could continue to draw your allowance as normal, and would ensure that the growth could be passed on to trust beneficiaries, such as Hollis, without any IHT applying (potentially saving 40% of that subsequent growth)

Discounted Gift Trust – Reserve a steady income amount (eg the 5% per year) for yourself whilst gifting the rest into trust. This provides an immediate reduction in your estate for IHT purposes whilst enabling you to keep access to the 5% per year allowance. I can provide more detail as required.

Conclusion

Don’t let the complexities of financial planning hold you back. Take the first step towards a more secure and prosperous future. Reach out to Chartwell Associates today, and let’s make this year the beginning of your best financial journey yet. Your goals, our expertise – together, we can achieve remarkable financial milestones.

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