What is domicile and why does it matter for tax?

13 May 2022

What is domicile?

The concept of “domicile” has been heavily discussed in the media in recent weeks. But what is domicile and why is it important?

In short (and losing a lot of the nuance) an individual’s domicile is the place of their permanent home. A home is more than just a place of residence. An individual’s residence is where they are currently living and this may change from year to year. Even an individual’s main residence where they spend the majority of their time is not the same as their domicile.

A person acquires a domicile at birth from their father, or if their parents are unmarried then from their mother. This is known as their “domicile of origin”. So Mr Smith born to English-domiciled parents has an English domicile of origin, irrespective of where he is born in the world.

An individual’s domicile can change over time and if it does, the individual is said to have acquired a “domicile of choice”. Two elements are required in order to establish domicile;

a) The individual must actually physically live where they intend to become domiciled, and

b) The individual must intend to reside permanently and indefinitely in that jurisdiction, with no end in sight.

For example if Mr Smith aged 30 moved from the UK to France to work for 10 or even 30 years he would not lose his English domicile as long as he does not intend to reside permanently in France. If he later decided he would like to stay in France permanently, he would lose his English domicile of origin and acquire a French domicile of choice at that stage. Alternatively, if Mr Smith intended to remain in France permanently and indefinitely from when he arrived he would obtain a French domicile of choice from the point of arrival, whether he moved aged 30 or much later in life, say to retire at 65.

Why does it matter?

Individuals who are domiciled outside of the UK (“non-doms”) have access to a number of favourable tax regimes. Among the most useful is the remittance basis of taxation, which allows a non-Dom to shelter non-UK income and capital gains from UK tax as long they are kept offshore: Tax is paid only on foreign income and capital gains brought to (or otherwise enjoyed in) the UK. In contrast an individual with a domicile in the UK is taxed on their worldwide income and gains.

Non-doms also benefit from significant inheritance tax exemptions on non-UK property, both on death (saving 40%) and on otherwise chargeable lifetime transfers such as setting up trusts (a 20% saving).

HMRC’s Approach

The essence of the test of a person’s domicile is easy to state, but in reality more nuanced and very difficult to prove. Unsurprisingly given the tax advantages, HMRC are vigorous in enquiring into non-doms, especially individuals born in the UK but claiming non-dom status as a consequence of their parent’s domicile, and such enquires can be intrusive, all-encompassing and lengthy to conclude. The final arbiter will, if necessary, always be the courts, but taking specialist legal advice early in the process can help to smooth and speed up the enquiry process or avoid potentially costly mistakes where planning is undertaken that is dependent upon domicile.

Domicile and the political landscape?

The tax treatment of non-doms is a substantial political and financial question. Non-doms bring in about £8bn a year of taxes; to put that into perspective the new NICs increase will raise about £6m a year.

Labour have announced that they intend to abolish the non-domicile tax regime. No details on how this will be accomplished, or what will replace it, have been announced although the party are considering a move to a shorter-term scheme for temporary residents. This could, for example, see tax benefits only available to  individuals resident in the UK for no more than five years, in line with a number of other G7 countries. In 2000 Gordon Brown, then Chancellor of the governing Labour party, announced a similar review that was eventually scrapped.

The Conservatives have announced no plans to change the law around domicile or its tax benefits.

If you wish to discuss domicile or assistance with HMRC enquires, please contact your usual JHA contact or the author Tom O’Reilly at TOReilly@jha.com.

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