Having looked at the principles of residence and ordinary residence for UK income tax and capital gains tax purposes, it is now important to consider the even more permanent status of domicile.
An individual is normally domiciled in the country which he regards as his home. He is born with a domicile of origin, which is the place where he was born or the domicile of his parents. However, this can be displaced by the acquisition of a domicile of choice once he is 16 or over although it will be revived if the domicile of choice ceases to exist.
An individual acquires a domicile of choice by going to another country with the purpose of living there permanently. Purpose or intention is therefore of fundamental importance. This issue was debated at some length in the recent Gaines-Cooper case.
The obligation to prove domicile will fall on the individual. For example, where HM Revenue and Customs makes a claim for tax based on the individual being UK-domiciled, it will be the individual’s responsibility to prove that he is not UK-domiciled.
For the purposes of inheritance tax, apart from domicile under the general law, there is also the concept of deemed domicile. Section 267 IHTA 1984 provides that an individual is treated as domiciled in the UK, even if under general principles he is not UK-domiciled, if:
– He was domiciled in the UK within the three years immediately preceding the relevant time or –
– He was resident in the UK in not less than 17 out of 20 years of assessment ending with the year of assessment in which the relevant time falls.
Domicile is relevant to all three personal taxes but it is essential to remember that deemed domicile is only relevant for the purposes of IHT, not CGT or income tax.
An individual who is UK- domiciled or deemed UK- domiciled is subject to IHT on his worldwide assets. Where an individual is non-UK-domiciled, he is only liable to IHT in respect of UK-situated assets. A life insurance policy issued by a UK insurer is usually an asset (in effect a debt) situated in the UK but there is an exception if the policy is issued under seal, when it is situated where the policy document is physically situated.
For income tax purposes, domicile is relevant where an individual has an overseas source of investment income or employment income from a non-UK employer in respect of duties performed abroad. In such cases, the overseas income of the non-UK-domiciled but UK-resident individual will be subject to UK income tax only to the extent that it is remitted to the UK. Similarly, for the purposes of CGT, a non-UK-domiciled but UK-resident individual will be subject to CGT in respect of gains on his overseas assets only to the extent that such gains are remitted to the UK.
In the Revenue’s Tax Bulletin Issue 29, an article was published explaining how the Revenue intends to continue to give guidance and advice on residence status and domicile, the action it will take on receipt of completed forms P85, P86 and initial non-UK domicile claims and when Section 9A Taxes Management Act 1970 enquiries on residence status and domicile aspects may be made.
Last, we have to look at double taxation. As already indicated in the section dealing with residence, an individual, who is resident in the UK and therefore subject to UK income tax and CGT, could also be resident in one or more other countries by reference to the domestic laws of that country, based on their physical presence in a particular country.
UK liability to IHT is largely determined by domicile but it may be that for estate or succession taxes in another country, residence is the key criterion so that double taxation in respect of death duties may be possible.
To ensure that the individual is not taxed twice on the same income, gains, estate and so on, double- taxation treaties exist between some countries. The UK has an extensive network of such treaties – although there are fewer in respect of inheritance tax and death duties – which are largely based on the Organisation for Economic Co-operation and Development model.
The treaty would normally provide a form of tie-breaker clause which overrides domestic law and establishes that for a particular purpose, for example, in respect of a particular type of income, the individual will be treated as resident in one country only. This country then has primary taxing rights over that individual’s income and gains arising from particular sources.
The standard OECD model would normally provide that the individual should be treated as resident in the country in which he has a permanent home. Where an individual has permanent homes in both countries, he will usually be deemed to be resident in the country in which he has his centre of vital interests, that is, most of his individual and economic relations.
A treaty may treat different types of income on a different footing, for example, earned income, investment income from overseas sources or business profits.