The Wire: Summer 2022 – Domicile – what is all the fuss about?

(Estimated read time 5 minutes)

Domicile – what is all the fuss about?

The term ‘domicile’ has been back in the news recently, but what is ‘domicile’ and what does it mean to be ‘non-domiciled’?

In short, domicile is, well, complicated! It is a status which is decided under general law and unlike nationality, a person can only ever have one domicile at a time.  Broadly speaking a person’s domicile can be regarded as the place of their permanent home, however, determining a person’s domicile involves many factors.

Domicile is distinct from nationality or citizenship and a person’s domicile is often different to their residency.   I find the easiest way to explain it, is to think about a person’s bloodline – where they came from and where their father came from before them.  For many of my clients, this can often involve two or three different countries where a family may have travelled and settled in different jurisdictions along the way and is often a puzzle that only a tax lawyer is qualified to solve.

Every person has a ‘domicile of origin’ at birth and if their parents were married at that time, they will follow their father’s domicile.  They will then continue to follow his domicile as a ‘domicile of dependency’ until they reach 16 years old.  After this time, a person can elect a ‘domicile of choice’ however, this can often be extremely difficult to prove.

The most interesting case was that of the entrepreneur Robert Gaines-Cooper. Mr Gaines-Cooper had a long running dispute with HMRC in respect of both his residency and domicile.  He had moved to the Seychelles and had claimed a ‘domicile of choice’ there, however, HMRC challenged this all the way to the Supreme Court where, by a majority decision, they won the case and the outstanding £30million tax bill.  Whilst the case involved the matters of both residency and domicile, the two were closely connected as acquiring a ‘domicile of choice’ involved the intention of permanent and indefinite residency in Mr Gaines-Cooper’s chosen country.

So why is domicile important? The clue is the fact that Mr Gaines-Cooper was defending a £30million tax bill.  A person’s domicile status will determine how much tax they pay and therein lies the reason that the concept of ‘domicile’ appeared in the news again recently.

Many countries wish to attract high income earners – such earners contribute substantial amounts of tax.  However, the world is a small place and many high earners are globally mobile; a regime which makes the UK a favourable place for high earners to settle therefore, seems very rational.  

A person who is non-UK domiciled can limit their Income Tax and Capital Gains Tax liabilities for the first seven years of UK tax residency by electing to file their tax returns on the ‘remittance basis’.  This means that tax is attributed only to income or gains that arise from assets held in the UK; assets retained in other jurisdictions may be excluded so long as funds are not transferred or ‘remitted’ into the UK. 

To continue to enjoy this regime once seven fiscal years of residency has elapsed, a ‘remittance basis charge’ becomes payable where a flat annual fee of £30,000 is payable, then after twelve tax years this charge increases to £60,000 p.a. Once a person has lived in the UK for fifteen (out of the last twenty) tax years, they automatically become ‘deemed domiciled’ in the UK.  This means that Income Tax and Capital Gains Tax becomes payable on worldwide assets.  Prior to becoming ‘deemed domiciled’ however, planning opportunities can be implemented to shelter or defer future taxes.  As the UK tax system (unhelpfully) runs from April to April and the calculation of years is a rolling calculation “15 out of 20 years”, clients can often be unsure of when their ‘deemed domicile’ date is.  If that applies to you, please do get in touch as we can provide clarity and ensure planning solutions are addressed in a timely manner.

It is not just Income Tax and Capital Gains Tax that has an impact; the area where forward planning can really be beneficial is estate planning. Until a non-domiciled person has lived in the UK for fifteen out of the last twenty years only assets held in the UK are subject to UK Inheritance Tax.  Thereafter, once a person becomes ‘deemed domiciled’ their worldwide estate falls into the UK Inheritance Tax net.  

Estate planning can be further complicated by the fact that usual spousal exemptions do not apply between married couples if they have different domiciles; many non-domiciled clients are surprised to learn that assets will not pass completely tax free between spouses upon death.

Effective planning, however, can reduce the Inheritance Tax burden ensuring spouses and indeed future generations, can inherit the optimum net estate possible.

Financial planning of this nature requires an understanding of tax law not only in the UK but in other jurisdictions, along with the impact of the Tax Treaty between those countries.  We work closely with international tax lawyers to ensure that the solutions we provide take into account not only where our clients are living today, but also where they plan to live in the future – a bit like domicile really, looking at where the assets have come from and planning for where they expect to have a permanent home in the future.

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