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Birth of a notion

Our panel of experts discuss the nature of domicile and how it impacts on an individual’s tax status

Who are non-domiciles?

Brown: Domicile connects an individual to a legal system for the purposes of determining a whole range of disputes relating mainly to legal status and property rights. Domicile can affect an individual’s legal ability to marry or to make a will. It forms the basis for a court’s jurisdic- tion in matrimonial proceedings and is a requirement for the making of a parental order in the case of surrogate births. An individual is UK domiciled if he or she has sufficient connection with one of the constituent countries and non-domiciled if that connection is lacking. Domicile is primarily a family law concept rather than a taxation concept.

Hull: In the general sense of the word, domicile is a legal concept which defines a person’s permanent home rather than a jurisdiction where they may live from time to time. All individuals are born with a domicile of origin, which is normally the same as their father’s at the time of their birth. You can also have a domicile of dependency, where a father changes his domicile before his child’s 16th birthday. The child then adopts the new domicile of the father as a domicile of dependency. You can also have a domicile of choice, where you choose where your domicile is. So a non-domiciled individual would be someone who is resident in a jurisdiction different from their domicile. For example, a French-born citizen living in London is a resident in the UK but is non-domiciled in the UK.

Penman: There is no legal definition of domicile for tax purposes. It is a general legal concept developed through UK case law. The concept of domicile is unique to the UK and does not equate to residence or nationality. Instead, an individual’s domicile is the place that he considers or intends to be his permanent long-term home. Therefore, an individual will be considered to be non-domiciled if his long-term connections or permanent home are outside the UK.

How can clients tell if they are non-domiciles?

Brown: When an individual is born, he or she acquires a domicile of origin, which is usually the domicile of the father. On attaining 16, this domicile of origin can be replaced with a domicile of choice. A domicile of choice arises when the individual resides in a particular jurisdiction with the intention of living there permanently or indefinitely, having no real intention of living anywhere else. In straightforward cases, an individual will be able to deduce his or her domicile status from these simple prin- ciples. In more complex cases, legal advice will be necessary.

Hull: If we ignore domicile of dependency, the only way to become non-domiciled is to change your domicile by choice. This is not a straightforward process. If an English- domiciled individual migrates and wishes to establish a foreign domicile of choice, they would need to prove that they intend to remain outside England indefinitely. It helps if all financial assets, property, bank accounts, shares, and so on, are disposed of and the individual buys a permanent home, obtains a job and to all intents and purposes severs all financial links with the UK. In the UK, it is necessary to wait three years before establishing a new domicile of choice, as a UK domicile is deemed to remain even after it is in fact lost, if the taxpayer has been resident in the UK for 17 of the last 20 years of assessment. Remember, you cannot deliberately change your domicile to improve your tax position.

Penman: There are three types of domicile – domicile of origin, domicile of dependence and domicile of choice. Domicile of origin is acquired at birth and is determined by the domicile of an individual’s father if born legitimately, even if birth occurs after the father’s death. If illegitimate, a child’s domicile is taken from its mother. As a dependent, a child cannot change domicile while a minor but his domicile will change if that of his father (or mother, if relevant) changes. Until January 1, 1974, married women also had a domicile of dependence as they took on the domicile of their husband on marriage. A domicile of choice can only be acquired by an adult of sound mind who must demonstrate a permanent home or connection abroad and an intention to maintain this in the long term.

How do you confirm with the Inland Revenue that you are a non-domicile?

Brown: The relevant HM Revenue & Customs manual advises staff not to get involved in queries about an individual’s domicile unless it is of immediate relevance in calculating tax liability. A potential tax charge must therefore be triggered. A UK resident could set up a bank account abroad and keep the income out of the UK. A non-resident could establish a discretionary trust, with non-UK assets, slightly above the available nil-rate band. The former will trigger an income tax charge for a UK dom- icile, the latter an inheritance tax charge. In both cases, a non-UK domicile would have no liability. When the relevant transaction is reported, HMRC will review the individual’s domicile status.

Hull: For a foreign national wishing to live in the UK, possession of a passport from a foreign jurisdiction, their birthplace or where they have spent most of their lives will affect their domicile. Once such an individual becomes resident in the UK, they should submit a DOM1 form to HMRC and file it before the submission of any tax return. HMRC will normally rule on domicile.

Penman: Non-domicile status can be notified to HMRC on form DOM1, form P86 or on the non-residence pages of a self-assessment tax return. However, HMRC will not confirm non-domicile status unless it has a direct effect on or is immediately relevant in deciding the UK income tax or capital gains tax liability of an individual.

What are the advantages of being a non-domicile for income and capital gains tax?

Brown: A non-domicile is liable to income tax on certain non-UK income only to the extent that the income is remitted to the UK. In a similar vein, a UK-resident individual domiciled elsewhere is subject to capital gains tax on assets situated outside the UK only to the extent that the gains are remitted to the UK. This principle is often known as remittance basis taxation. With careful planning, the UK-resident but non-UK-domiciled individual can use the remittance basis rules to reduce, defer or even eliminate tax in respect of foreign income or gains.

Hull: Foreign income and capital are not taxed on a non-domiciled individual unless the income or capital is remitted to the UK. Therefore, all income and capital gains earned outside the UK can accumulate without the payment of UK tax.

Penman: UK-domiciled individuals are liable to UK tax on their worldwide income. A non-domiciliary is only liable to UK income tax to the extent that his income arises within the UK or he brings income to the UK, known as the remittance basis. The remittance basis does not apply to income from the Republic of Ireland, which is taxed when it arises. Similarly, a UK-domiciled individual is liable to tax on his worldwide capital gains whereas a non-domiciliary is only liable to UK capital gains tax on gains arising within the UK or remitted to the UK. Non-UK domiciles also enjoy tax advantages in respect of interests in non-UK trusts or companies.

Are there the same advantages for inheritance tax?

Brown: In general terms, inheritance tax is levied on UK-domiciled individuals in respect of their worldwide assets. Individuals who are not UK domiciled are liable to inheritance tax only in respect of assets situated in the UK. The situation is somewhat complicated by the concept of deemed domicile. An individual is deemed UK domiciled if he or she was UK resident in not less than 17 of the 20 tax years ending with the year in which a chargeable inheritance tax transfer occurs. An individual is also deemed to be UK domiciled for a further three years after losing a previous UK domicile. These rules apply for inheritance tax only.

Hull: In general, domicile for inheritance tax is the same as for income and capital. But it is possible that a citizen could be deemed to be domiciled in the UK for inheritance tax. The circumstances in which this could happen are where the individual was domiciled in the UK at any time during the proceeding three years or the individual has been resident for 17 out of the last 20 years of assessment.

Penman: A UK domiciliary is subject to inheritance tax on worldwide assets held at the date of death or on lifetime chargeable transfers, such as gifts into discretionary trusts. A non-domiciliary, including a non-UK resident, is only subject to inheritance tax on UK-situated assets. An individual will be deemed to be domiciled within the UK for inheritance tax purposes if he is resident in the UK in 17 out of the last 20 years. At the point of change, his worldwide estate comes into the charge of inheritance tax. Exposure to inheritance tax can be reduced if a non-domiciliary takes steps to hold assets in offshore structures before a deemed domicile is acquired.

Are they any drawbacks of being a non-domicile?

Brown: An individual must be domiciled somewhere. While UK-resident but non-domiciled status is generally advantageous for tax purposes, it might not have universal advantages. In a recent divorce case, the husband had a Nigerian domicile but his wife claimed successfully to have acquired a UK domicile of choice. The potential divorce settlement arrived at under English law principles was much more financially advantageous to the UK-domiciled spouse than an equivalent settlement under Nigerian law. Domicile is essentially a family law concept. Its tax effects are in some respects incidental.

Hull: It depends very much on the individual and what they want to achieve. It is important that people contact a specialist accountant or tax adviser who can look at their circumstances and ensure that the person fully understands the implications of being a non-domicile.

Penman: The principal drawback relates to the restriction of the exemption from inheritance tax on transfers from a UK-domiciled person to non-UK-domiciled spouse. In these circumstances, the exemption is limited to 55,000.

Is it likely that the Government will change the domicile rules?

Brown: The domicile rules are unlikely to change significantly but the tax consequences of a particular domicile status may change. The Government has been looking at possible changes for many years but has not apparently reached any firm conclusion. Reducing the tax advantages enjoyed by non-UK domiciles may encourage affected individuals to leave the UK. As many UK-resident non-domiciles generate significant wealth and pay UK tax on UK investments and earnings, significant changes to the current rules might lower the tax yield.

Hull: The Government has been looking at the tax position of non-domiciles for a number of years but to date has taken no action. In 2003, the Treasury and the Inland Revenue produced a background paper entitled, Reviewing the residence and domicile rules as they affect the taxation of individuals. This year’s Budget report stated that the Government is continuing to review the residence and domicile rules and would welcome further contributions to the debate.

Penman: In his 2002 Budget statement, the Chancellor stated that he was “reviewing the complex rules on residence and domicile”. However, the current rules make the UK a very attractive place for wealthy foreigners and the effect of a change in the rules on, for example, the City of London as an international financial centre may make any major changes unlikely. A background paper was published with the 2003 Budget but, as yet, the promised consultation paper has not materialised.

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