Domicile is an important concept in relation to those who move to the UK but were born elsewhere. This is because the tax system does not tax people who are temporarily resident in the UK on overseas income, gains and assets unless and until the funds are brought into the UK or otherwise used to enhance the individual’s lifestyle in the UK.
It is accordingly important to understand the concept of domicile. Domicile is actually a legal concept, not a tax one. It ties an individual to a system of law. This can be important in relation to family law in particular.
Because domicile fills this role, it is not possible either to be domiciled nowhere or to be domiciled in two different places simultaneously (although it is possible to be domiciled in the UK under UK law but domiciled in another country under that country’s law).
Everyone starts life with a “domicile of origin”. This is the domicile of the individual’s father (or mother if there was no father living at the time) at the time of the individual’s birth. In most cases it is the person’s country of birth but that is not always the case. For example, if an individual moves to the UK from India intending to return to India in due course, he is likely to be Indian domiciled and if he fathers a child while he is living in England, the child will have an Indian domicile. This will be so even though the child will be an English national and even if the father has taken British nationality.
It is hard to change one’s domicile. The concept is intended to create legal continuity. One can change ones domicile by going to another country with the intention of remaining there permanently or indefinitely. However if one subsequently leaves that country permanently, the domicile of origin revives. With a Federal country such as the USA where each State has its own system of law, domicile ties one to an individual State, not to the country. For example, suppose a person who was born in the UK of UK parents emigrates to New York and establishes a New York domicile. When he reaches retirement age he moves from New York to California. When he leaves New York he will lose his New York domicile and become UK domiciled again – and keep that UK domicile until he establishes an intention to reside permanently in California.
Unlike with most tax matters, where it is for the taxpayer to displace an HMRC assessment, the onus of proving a change of domicile falls on the person who alleges that the change has occurred. That means that if HMRC allege that a person who came to the UK with a foreign domicile the onus is on HMRC to prove it. It is very difficult, if not impossible, for HMRC to prove that an individual intends to live permanently in the UK if he asserts that he intends to return home at some stage. Accordingly whilst HMRC will challenge whether a person may have become UK domiciled, they are very unlikely to pursue such a claim before the Appeals Tribunal whilst the individual is still alive and able to assert his intention. They normally wait until after his death.
From a tax point of view, from April 2017, a person who is not domiciled in the UK will however be treated as if they were when they have been tax resident for more than 15 of the last 20 tax years. However, it is possible to lock in some of the advantages afforded to you as a non-dom prior to the change in rules. Accordingly, it is beneficial for a non-dom to structure their non UK affairs to add further protections against UK tax arising on offshore income and gains, as well as protecting non-UK assets from UK inheritance tax.
If you would like to discuss IHT further, or any other tax planning opportunities, please get in touch.