Domicile is a term used to describe an individual’s permanent home, or the country in which they have their most substantial connections. Domicile is an important consideration for tax purposes, as an individual’s domicile can affect their liability for various taxes, including income tax, inheritance tax, and capital gains tax. Losing UK Domicile is something that many long-term British expats have assumed has occured for them, but that may well not be the case.
In the UK, an individual’s domicile is determined by a set of complex rules that take into account a variety of factors, including their place of birth, their family history, and their intention to remain in the UK or to leave and settle elsewhere. In this article, we will explore the concept of UK domicile, how it is defined, and how it can be lost.
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Defining UK Domicile
In the UK, an individual is generally considered to be domiciled if they have their permanent home in the UK or if the UK is the country to which they have the closest ties. Domicile is a legal concept, and it is distinct from other terms such as residency or citizenship.
There are three types of domicile recognized under UK law:
- Domicile of origin: An individual’s domicile of origin is usually determined by the domicile of their father at the time of their birth. For example, if an individual is born to a father who is domiciled in the UK, they will generally be considered to have a domicile of origin in the UK.
- Domicile of choice: An individual may acquire a domicile of choice by demonstrating a clear intention to settle permanently in a new country. This usually requires evidence of long-term residence, such as the purchase of a property, the establishment of business interests, and the severing of ties with the previous country of domicile.
- Domicile of dependency: In some cases, an individual’s domicile may be determined by the domicile of their spouse or civil partner. This is known as a domicile of dependency.
Losing UK Domicile
While an individual’s (e.g.UK) domicile is initially determined by their place of birth or the domicile of their parents, it can be changed through a process known as “domicile acquisition” – thus losing one’s UK Domicile. This usually requires evidence of a clear intention to permanently leave the UK and settle elsewhere.
Similarly, an individual may lose their UK domicile through a process known as “domicile abandonment”. This occurs when an individual demonstrates a clear intention to permanently leave their country of domicile and settle elsewhere.
There are several ways in which an individual may demonstrate a clear intention to abandon their UK domicile:
- Long-term residence abroad: If an individual spends a significant amount of time living and working abroad, this may be evidence of a clear intention to abandon their UK domicile.
- Severing ties with the UK: If an individual sells their property in the UK, closes their bank accounts, and terminates their business interests, this may be evidence of a clear intention to permanently leave the UK.
- Formal declarations: An individual may formally declare their intention to abandon their UK domicile through a variety of legal documents, such as a deed of renunciation or a declaration of domicile.
The process of losing UK domicile can be complex, and it is important to seek professional advice to ensure that all necessary steps are taken and that all legal requirements are met.
Why Domicile Matters for Tax Purposes
An individual’s domicile is an important consideration for tax purposes, as it can affect their liability for various taxes, including income tax, inheritance tax, and capital gains tax.
For example, an individual who is domiciled in the UK is generally subject to UK inheritance tax on their worldwide assets. This means that if they die with assets located outside of the UK, these assets may still be subject to UK inheritance tax.
In contrast, an individual who is not domiciled in the UK but who is considered to be a “deemed domicile” may still be subject to UK inheritance tax on their UK assets. A “deemed domicile” is an individual who has been resident in the UK for at least 15 out of the previous 20 tax years. In this case, the individual is subject to UK inheritance tax on their worldwide assets, including those located outside of the UK.
Domicile can also affect an individual’s liability for income tax and capital gains tax. For example, an individual who is domiciled in the UK is generally subject to UK income tax on their worldwide income, whereas an individual who is not domiciled in the UK may only be subject to UK income tax on income earned in the UK.
Similarly, an individual who is domiciled in the UK is generally subject to UK capital gains tax on their worldwide capital gains, whereas an individual who is not domiciled in the UK may only be subject to UK capital gains tax on gains realized on UK assets.
Who Makes The Decision on Whether You Are UK Domicile or Not?
HM Revenue and Customs (HMRC) may be involved in making a determination of an individual’s domicile status for tax purposes, but they do not have the final say in determining an individual’s domicile status.
HMRC will typically consider a variety of factors when making a determination of an individual’s domicile status, such as an individual’s place of birth, the location of their permanent home, and their connections to other countries. HMRC may also consider any evidence provided by the individual regarding their intentions and connections to different countries.
However, the final determination of an individual’s domicile status is typically made by the courts. The courts will consider a variety of factors, including those considered by HMRC, when making a determination of an individual’s domicile status.
A decision on domicile is typically made during the probate process, which is the legal process of administering a deceased person’s estate.
During the probate process, the executor of the deceased’s estate is responsible for gathering and valuing the assets of the estate, paying any debts and taxes owed, and distributing the remaining assets to the beneficiaries. The executor will typically file an inheritance tax return with HM Revenue and Customs (HMRC), which will include information about the deceased’s domicile status.
If the deceased was domiciled in the UK, their worldwide assets will be subject to UK inheritance tax. If the deceased was not domiciled in the UK, only their UK assets will be subject to UK inheritance tax. If there is a dispute about the deceased’s domicile status, this may need to be resolved before the probate process can be completed.
It is important to seek professional advice when considering changes to domicile status, as the process can be complex and may require careful planning and execution to ensure that all legal requirements are met. Ultimately, the best approach will depend on an individual’s personal circumstances, their goals, and their priorities, and it is important to work with a Qualified professional to ensure that your wealth transfer plan reflects these considerations.
If you’re interested in obtaining a full legal opinion on your Domicile status (which includes external legal counsel sign off and of which HMRC are less likely to challenge) we work in partnership with a legal expert to provide this. Contact us today to understand more.