A person’s domicile status is crucial to determining their liability to UK income tax, capital gains tax and inheritance tax. The law of domicile is a matter of common law although tax legislation has introduced a deemed domicile for the purposes of longer-term UK residents.
There are three types of domicile:
- Domicile of origin
- Domicile of choice
- Domicile of dependency
A domicile of origin is acquired at birth from a child’s father – the child assumes the domicile of their father, or if illegitimate, they will assume their mother’s domicile. Should the parent’s domicile change before the child is age 16, so will the child’s domicile change (a domicile of dependency).
An individual must be physically present in a jurisdiction and have a fixed and settled intention to live there permanently or indefinitely to acquire a domicile of choice.
You can only have one domicile at a time, and you must always be domiciled somewhere.
Deemed domicile status for tax purposes
From 6 April 2017, your deemed domicile status is relevant for income tax, capital gains tax and inheritance tax purposes. If you are non-UK domiciled as a matter of common law you are deemed to be UK domiciled once you have been UK tax resident for 15 out of the immediately preceding 20 tax years.
You can also become deemed domiciled for different tax purposes where you were previously UK domiciled and acquired a domicile of choice. For income tax and CGT purposes and before returning to the UK you will be defined as a ‘formerly domiciled resident’: you will be deemed domiciled in the UK during any period when you are subsequently UK tax resident. A similar rule applies for inheritance tax purposes which deems you domiciled after returning and two years of being UK resident. Also, for IHT purposes you will only lose your UK domicile after three calendar years from the change of domicile – for those three years you will be deemed domiciled for IHT purposes. However, there is a further requirement that considers your residency throughout the preceding four tax years and therefore may only be outside the scope of IHT in the fifth year of non-residence. A non-UK domiciled individual with a UK domiciled spouse can elect to be treated as domiciled in the UK.
For determining tax residence, the statutory residence test is used for 2013/14 onwards.
Non domiciled tax implications
If you are non UK domiciled and not deemed domiciled, you can choose to be taxed on the remittance basis. You will only liable to UK tax on foreign income and gains that are remitted to the UK. For IHT purposes, your non UK assets will generally be outside the scope of UK IHT.
Deemed domiciled tax implications
If you are deemed domiciled under the 15-year rule and UK resident, you will be subject to income tax and CGT on the arising basis. For IHT purposes, if you are deemed domiciled your worldwide estate will be subject to IHT.
There are special rules which apply where a settlement was established by a non-domiciled person.