What is domicile and why does it matter for tax?
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).
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.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).