Residence and Domicile

Residence and domicile

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:

• imposing an annual charge of £30,000 on foreign domiciled individuals who claim the remittance basis and have been resident in the UK for at least seven out of the last nine years; and
• withdrawing the personal allowance from those using the remittance basis.

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.

• The charge applies to each individual separately, according to their circumstances.
• UK trusts receiving income or gains from outside the UK may be subject to the charge if the settlor or a beneficiary is based in the UK.
• Money brought into the UK to pay the charge will not be subject to UK tax.
• Works of art available for public access at an approved gallery or art museum in the UK for no more than two years are also not charged.
• Property of any kind, if the ‘notional remitted amount’ is less than £1,000, does not attract the charge.
• Clothing, footwear and jewellery for the personal use of the taxpayer, their spouse, child or grandchild is exempt from the charge.
• Assets already in the UK that were purchased with foreign investment income are exempt.

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.

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 remittance basis applied to those who were resident but not ordinarily resident, but will now apply only if the individual is tax resident and not UK domiciled.
• Transfer of assets abroad provisions did not apply to those who were not ordinarily resident; it will now apply to those individuals who are tax resident.
• Foreign service relief for termination payments relating to UK duties applied to earnings related to UK duties for individuals who were not ordinarily resident, but will now apply only for earnings in respect of overseas duties.
• Capital gains tax applied to those who were resident or ordinarily resident.  It will now apply only to those who are tax resident.
• Capital gains tax temporary residence rules applied to persons who were resident or ordinarily resident and will now apply to those who are tax resident.
• Seafarers' Earnings Deduction was available to those who were not ordinarily resident in the UK or tax resident in a European Union or  European Economic Area state and will now apply to those tax resident in the UK, EU or EEA.
• Taxable lump sums from pension schemes (ESC A10) applied in respect of UK earnings of individuals who were not ordinarily resident, but will now apply only in respect of overseas earnings.
• ISAs (individual savings accounts) were available to individuals who were resident and ordinarily resident in the UK and will now be available to those who are merely resident.
•  FOTRA (Free of Tax to Residents Abroad) securities applied where the holder was not ordinarily resident, but will now apply to the holder who is not tax resident.

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 remittance basis
• transfer of assets abroad
• overseas workday relief
• seafarers' earnings deduction
• foreign service relief.

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’:

• if the individual was not ordinarily resident in the UK for 2011/12, foreign income and gains for the tax year 2013/14;
• Otherwise, foreign income and gains for the years 2013/14 and 2014/15.
• Where it is necessary to determine whether a person is (or is not) ordinarily resident in the UK at a time on or after 6 April 2013, the question is to be determined as it would have been if the legislation had not been passed.

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.