UK domicile rules & their importance for tax

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  • To avoid unexpected UK tax charges, it is essential to work out if you are UK domiciled or not, even if you are not resident in the UK.

UK inheritance tax

  • If you are UK domiciled (or deemed domiciled) you are liable to UK inheritance tax at 40% on all your assets worldwide, regardless of where you are resident.
  • If you are non-UK domiciled you are only liable to UK inheritance tax on your UK assets and it may be possible to hold your UK assets in such a way that no liability to UK inheritance tax will arise.
  • In addition, the usual full exemption from inheritance tax for gifts between spouses does not apply where a UK domiciled (or deemed domiciled) spouse passes assets to his or her non-domiciled spouse - in those circumstances, the relief has long been restricted to £55,000. However, this limit is to be increased from April 2013. The Government proposes increasing the limit (to £325,000), and introducing provisions to allow a non-UK domiciled spouse to opt to be treated as UK domiciled for inheritance tax purposes. It is not currently clear whether a non-UK domiciled individual who elects to be treated as UK domiciled for inheritance tax purposes could subsequently take steps to ‘lose’ that elected status.

Domicile

  • Domicile is not defined in UK tax legislation. It is different from residence or nationality.
  • Your domicile is broadly where your permanent or habitual home is and where you intend to live indefinitely. This may not be the country in which you are currently resident. In some cases, a person’s domicile may be in a country which he has never visited but from which his family originate.

Domicile of origin

  •  Every person receives a domicile of origin at birth.
  • If your parents were married when you were born, your domicile of origin will be the country where your father was domiciled at the time of your birth. This may not be the country in which your father was living when you were born.
  • If your parents were not married at the time you were born, your domicile of origin will be the country where your mother was domiciled at the time of your birth.
  • Your domicile of origin is important because if you have no settled or permanent home at any time your domicile of origin may revive - meaning that you will be treated for UK purposes as domiciled in the country which is your domicile of origin. This is a particular concern for people whose domicile of origin is in the UK.
  • If your parents lived in a number of different countries before you were born and/or during your childhood (or your grandparents moved countries) you may need to gather considerable information and supporting evidence to establish your domicile of origin.

Changing your domicile

  • Your domicile may change if you move to a new country.
  • Until you are 16 (or you marry, if you get married before you are 16) your domicile can change if the domicile of the person on whom you are dependant (often your father) changes.
  • Once you are 16 your domicile depends on your own circumstances and intentions.
  • If you become resident in another country and intend to remain there permanently or indefinitely you will acquire a domicile of choice in that country.
  • If you later leave that country and no longer intend to reside there permanently or indefinitely you will lose your domicile of choice in that country. At that point you may acquire a new domicile of choice, or your domicile of origin may revive.
  • Your domicile will not change, however, if you leave the country in which you are domiciled to take up residence in another country for a limited time only, and you intend to return to the country in which you are domiciled at some identifiable time in the future.
  • You can live in a country for many years without becoming domiciled there if you do not intend to remain there permanently or indefinitely and you maintain links with the country in which you are domiciled.
  • British expats (or others who have, or have had, a UK domicile) may live abroad for many years without losing their UK domicile if they have not taken sufficient steps to break their ties with the UK.

Deemed domiciled

  • Even if you are non-UK domiciled under the rules discussed above, you may be treated as UK domiciled for UK inheritance tax purposes if you have been domiciled in the UK within the last three years, or were resident in the UK for 17 out of the last 20 tax years.

Domicile statement

  • A domicile statement which sets out, contemporaneously, your family history and your intentions for the present and future, can prove extremely useful in any later discussions with the UK tax authorities as to your domicile.

This note is a general guide based on the law as at 22 March 2012. Tailored advice on the facts should be sought.

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