The fourth article in a series on the Statutory Residence Test
The UK concept of domicile is different to that of many other countries, where they refer to domicile as based on their residence.
While residence is relevant to domicile, the UK concept is much more fundamental; it is a place to which a person will ultimately return. This is one reason why so many buy grave plots in low-tax jurisdictions, although this factor is by no means conclusive evidence of domicile.
The concept of domicile is broadly similar throughout the countries comprising the United Kingdom, although strictly there is no such thing as a UK domicile; it is a domicile in England and Wales, Scotland or Northern Ireland.
Everyone acquires a domicile. A child normally acquires the domicile of their parents, but if they have different domiciles, it is that of the parent with whom they have the closest ties; this is known as the domicile of origin.
After a child reaches the age of 16, they can acquire a domicile of choice by abandoning their domicile of origin. This is not easily done, as they must effectively sever all connection with their domicile of origin. For more information, see the cases of CIR v Bullock and Clore Deceased (No. 2) in the 'Related links' section on this page.
The case of Gaines-Cooper (also in the 'Related links' section on this page), although being primarily a case on residence, was influenced by the fact that Mr Gaines-Cooper, although he had lived in several jurisdictions, had never abandoned his domicile of origin.
Should the person abandon their domicile of choice, the domicile of origin will revive, unless there is a clear intention to adopt a new domicile of choice.
That is the basic definition of domicile; there are other definitions of domicile, for various tax purposes.
For inheritance tax (IHT) purposes, a person who has been resident in the UK for 17 out of the last 20 years is treated as ‘deemed domiciled’ in the UK. This effectively brings their estate within the charge to IHT.
There is also a restriction on the amount a person domiciled in the UK can transfer to a non-UK domiciled person without incurring a charge to IHT. For many years, this was £55,000 but the Finance Bill 2013 has increased it to the amount of the nil-rate tax band.
This definition applies only to inheritance tax and does not impact on other taxes.
Apart from the inheritance tax provision designed to keep UK property within the UK, a person who is non-UK domiciled is normally taxed more leniently than UK-domiciled individuals, in order to encourage investment and talent to the UK.
A foreign-domiciled individual, in common with a UK-domiciled individual who was ‘not ordinarily resident’, was taxed on a remittance basis for income tax, although the capital gains tax treatment could differ between the two types of taxpayer.
The Finance Act 2008 changed the treatment of foreign domiciled individuals by:
From 2012, the £30,000 charge remains for those who have been resident in the UK for less than12 years, but a new charge of £50,000 applies for those using the remittance basis who have been UK resident for 12 years or more.
The charges do not apply to those with unremitted capital or income of less than £2,000.
Another change brought in by the Finance Act 2012 is that foreign-domiciled individuals can remit overseas income and gains to the UK without a charge to UK tax, where the purpose of the remittance is to invest in a ‘qualifying investment’.
A ‘qualifying investment’ is an investment in an unlisted company, or in a company listed on an exchange-regulated market, which carries on trading activity on a commercial basis or undertakes the development or letting of commercial property.
An individual can opt in or out of the remittance basis from one year to another.
A person who is foreign domiciled may be resident in the UK, acquire property here and retain their foreign domicile. However, they should be careful to avoid acquiring a domicile of choice in the UK.
To do this, the individual should retain sufficient links with their country of origin, make regular trips to the country, retain business connections there and make a will under its law.
If the person owns a property in the UK, they may need to make a UK will in respect of the property.
Another change brought in by the Finance Act 2012 is that foreign domiciled individuals can remit overseas income and gains to the UK without a charge to UK tax, where the purpose of the remittance is to invest in a ‘qualifying investment’.
A ‘qualifying investment’ is an investment in an unlisted company, or in a company listed on an exchange regulated market, which carries on trading activity on a commercial basis or undertakes the development or letting of commercial property.
An individual can opt in or out of the remittance basis from year to another.
A person who is foreign domiciled may be resident in the UK, acquire property here and retain his foreign domicile. However, he should be careful to avoid acquiring a domicile of choice in the UK. To do this, he should retain sufficient links with his country of origin, make regular trips to his country, retain business connections there and make a will under the law of his own country. If he owns a property in the UK, he may need to make a UK will in respect of the property.
Ordinary residence is not defined in the legislation but denotes a habit of being resident in the UK.
There were certain advantages (and one or two disadvantages) to being ‘not ordinarily resident’. These were:
The abolition of the concept of ordinary residence represents a major change in the legislation. There will therefore be transitional relief for those individuals who had reliefs from tax by virtue of being not ordinarily resident.
These will apply to:
The amendments have effect in relation to an individual’s income and gains for the year 2013/14 and subsequently. They give relief for ‘eligible income and gains’:
To access other articles in this series, visit the 'Statutory Residence Test' section on this page.
ACCA has produced a guide to the non-domicile levy and includes a flowchart detailing the key considerations, which can be downloaded via the 'Related documents' section on this page.
You can also access further information via the 'Related links' section on this page.