PAM Guide to Wealth Management

Concept of domicile and residence

If you are resident but non-domiciled in the UK, you currently enjoy certain tax advantages over resident and domiciled individuals. Even if you are UK domiciled, you might still be able to benefit from offshore planning if you are married to, or the successor of, a non-UK domiciled individual. This said, the advantages of non-domiciled status are becoming more limited than was previously the case.

Whilst non-domiciled status is presently potentially available for an extended period - save for inheritance tax (IHT), proposed changes to the tax code will mean that from April 2017, those who have been resident for at least 15 out of the previous 20 tax years will be deemed to be UK domiciled for all UK tax purposes.

Furthermore, whilst historically non-domiciled status enabled individuals to keep their overseas assets private from the UK's HM Revenue and Customs (HMRC), recent legislative developments - including most recently the introduction of Common Reporting Standards (CRS), mean that these assets are more often than not required to be disclosed to HMRC.

The UK is almost unique in the world in having this particular concept of domicile. Domicile is a legal and not a taxation concept that connects an individual with a jurisdiction, such as a country, state or province, which has its own legal system.

Non-UK domiciliaries are protected from UK income tax and capital gains tax (CGT) on income and gains from their overseas assets, unless such income and gains are brought into the UK (or in some cases if they are indirectly enjoyed in the UK), which is called the remittance basis of taxation.

Overseas assets are also protected from inheritance tax. Presently if you have been resident for UK tax purposes in any part of 17 of the past 20 tax years, which can mean just over 15 calendar years, then you are deemed domiciled for IHT and subject to IHT on worldwide assets. This deeming concept does not yet apply to income tax and CGT. Non-domiciled individuals, however, can plan in advance of this eventuality to mitigate the IHT liability on their estate through the use of offshore trusts and companies.

Briefly, if non-UK assets are transferred to an offshore trust by a non-UK domiciled settlor, there is no IHT nor any CGT liability on the creation of the trust. Furthermore, non-domiciled beneficiaries resident in the UK will only be taxed upon any benefit they receive in the UK from that trust. Thus as a non-domiciled beneficiary, you can establish an offshore bank account in your name to receive income distributions from the offshore trust without remitting them to the UK, so it is not taxed in the UK. In contrast, beneficiaries who are resident and domiciled in the UK can be liable to either income tax or CGT on distributions from such a trust, wherever it is received. Such individuals are also liable to income tax and CGT on income and gains from their worldwide assets, whether or not remitted.

If you are an employee who has been sent to work for part of the year in the UK, non-domiciled status will mean that earnings relating to duties performed overseas may not be taxed in the UK (unless they are remitted to the UK) at least for the first three years of residence and in some circumstances beyond that.

It is not totally good news for non-domiciliaries, however. There is a limit on the spouse exemption from IHT on transfers from a UK-domiciled individual to a non-UK domiciled spouse of a maximum of £55,000, whereas it is unlimited for UK domiciled individuals and for couples who are both non-UK domiciled. It is now possible for the non-UK domiciled spouse to elect to be treated as UK domiciled, so as to secure the spouse exemption, but their whole estate can then be subject to IHT.

There are basic criteria that you can use to determine if you are non-domiciled, but the test is subjective. Furthermore, your domicile status can change and is not set in stone.

The concept of domicile does not equate to residence or nationality. Individuals are born with a domicile of origin, which is normally the same as their father's domicile at the time of their birth. If illegitimate, a child takes his domicile from his mother and there are special rules for children whose parents have separated, or divorced.

An individual can also have a domicile of dependency, if the relevant parent changes their domicile before a child's 16th birthday. In this case, the child adopts the domicile of their parent at that date as a domicile of dependency. This converts into a deemed domicile of choice upon the child reaching 16 years of age.

A domicile of choice can also be acquired at any time by a person over the age of 16, if they move to a new home in a different country and their intention is to maintain this indefinitely, or permanently. The burden of proof lies with whoever is trying to prove a change of domicile, whether that is HMRC or an individual.

It can be difficult to prove a change in domicile and individuals must be in a position clearly to demonstrate factors that show their new home has the character of permanence. It is sensible to take legal advice regarding your domicile, although the relevant HMRC manual advises staff not to get involved in queries about an individual's domicile status, unless it is of immediate relevance in calculating their tax liability. You normally notify HMRC of your non-domicile status on the non-residence pages of a self-assessment tax return. However, HMRC will not review whether or not you are non-domiciled, until it becomes relevant in determining your income tax or CGT liability.

The new deemed domicile¬Ě rules coming into effect in April 2017 (as mentioned above) seek to bring some clarity and certainty to a frequently hotly contested area of the law. Under the new regime an individual will still have 15 tax years in which they can claim non-domiciled status whilst resident in the UK.

An example of a reasonably clear case of a non-UK domiciled status is an individual born in France whose father was born and continues to live in France. He comes to work in London for a few years but retains property in France and intends to live in France later in life.

The longer someone lives in the UK, eventually the harder it will become to defend against an HMRC claim that they do not intend to stay here for the rest of their lives. However, it can remain fairly straightforward to defend the claim, if there is a point in the future when they intend to and do leave. In the future, the proposed extension of the deemed domicile concept to all taxes will mean there will be less incentive for HMRC to investigate non-UK domicile claims.

Arguably, a harder situation is where an individual is born in the UK and still lives here, but whose father was born overseas and had maintained his domicile overseas at the date of the child's birth. The individual takes the domicile of their father, so they would normally have a domicile of origin in the overseas country where the father was born. The case can more easily be maintained, if the individual continues to have ties with his father's country of origin. Having assets there, family and social ties, a property and making regular visits to the other country, for example, will all support the case for a continuing foreign domicile. Verbal statements and more tenuous connections, such as burial plots, will not generally assist.

A more complex case is when individuals flee to the UK as refugees, or to claim political asylum. If they cannot return to their own country, because of concerns over their safety and matters beyond their control, but intend to do so in circumstances of regime change for example, then this offers good support for a continuing non-UK domicile. Currently, Syrian refugees are the most obvious example of people who are in this situation.

HMRC has brought some legal cases to determine whether individuals are domiciled or resident in the UK for tax purposes. One case that went to the Special Commissioners was Allen and Hately v HMRC SpC 481, in which Mrs Johnson, who was born in the UK, lived abroad with her husband during his working life. They retired to Spain and acquired a domicile of choice there. After Mr Johnson's death, as a result of ill health, Mrs Johnson had to live with her half-sister in England until her own death five years later, although she always wanted to return to Spain and continued to maintain her old home there.

The Special Commissioners ruled that Mr and Mrs Johnson had acquired a domicile of choice in Spain and that Mrs Johnson had not reverted to her domicile of origin on returning to live in the UK. HMRC failed to show that Mrs Johnson had abandoned her Spanish home or her ongoing intention to live in Spain when circumstances permitted.

In Morris v Davies [2011] ECHC 1773 (Ch) the High Court had to consider whether Mr Davies (deceased) had acquired a domicile of choice, or retained his domicile of origin in the UK, in relation to a dispute over his will. In 2001, Mr Davies left the UK to live and work in Belgium, in order to be closer to his fiance a Belgian national. After a period working and living in France, he died in Paris in 2008.

In his decision the judge found that, despite Mr Davies having his job, his fiance and his home overseas (with no plans to return), he had never relinquished his domicile of origin in the UK. The judge considered influential factors (amongst others) to be that Mr Davies retained property in the UK and returned to the UK for his holidays. Furthermore, Mr Davies never developed an affection for Belgian culture (for instance he never learnt Flemish) and most of his friends were English.

The facts and circumstances of every case need to be considered carefully. A higher standard of proof is required to demonstrate that a domicile of origin has been displaced by a new domicile of choice, than to demonstrate a new domicile of choice has been acquired from another domicile of choice, or has been abandoned.

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