Understanding domicile for UK tax purposes

When it comes to taxation, understanding individual domicile status is crucial. In the U.K., domicile plays a significant role in determining an individual’s tax liabilities. It is a complex concept that requires careful consideration, as it can have a substantial impact on current and future tax liabilities.

Domicile, typically acquired at birth and can be difficult to change, is a legal concept that refers to the country that an individual considers their permanent home. It is different from nationality or residence, as it is based on an individual’s intention to reside permanently or indefinitely in a particular country.

For tax purposes, the U.K. distinguishes between three types of domicile; domicile of origin, domicile of choice, and deemed domicile.

1. Domicile of origin: is acquired at birth and is usually based on the domicile of an individual’s father. For example, if an individual’s father was domiciled in the U.K. at the time of birth, such individual would be considered to have a U.K. domicile of origin.
2. Domicile of choice: can be acquired by demonstrating a clear intention to permanently reside in a different country. This can be achieved by severing ties with the U.K., such as selling property, closing bank accounts, and establishing a permanent home elsewhere. However, changing domicile of choice can be challenging, as it requires strong evidence of an individual’s intention to permanently leave the U.K.
3. Deemed domicile is a rule that applies to individuals who have been resident in the U.K. for a certain number of years. Under this rule, individuals who have been resident in the U.K. for any part at least 15 out of the previous 20 tax years are deemed to have a U.K. domicile for tax purposes, regardless of their actual domicile status. This means that even if you have a domicile of origin or choice in another country, the individual will still be subject to U.K. tax on their worldwide income and gains.

For U.K. domiciles, inheritance tax is applicable on their worldwide assets, regardless of where they are located. If an individual is a U.K. domicile, their estate will be subject to inheritance tax on all your assets, including property, investments, and other possessions, regardless of whether they are situated in the U.K. or abroad.

On the other hand, U.K. non-domiciles have a more favourable position when it comes to inheritance tax. Non-domiciles are only subject to inheritance tax on their U.K. assets, rather than their worldwide assets. This means that if non-domiciles and have assets located outside of the U.K., they will not be subject to inheritance tax upon death.

Non-domiciles can take advantage of excluded property rules with effective planning prior to becoming deemed domicile. Excluded property rules allow non-domiciles to exclude certain assets, such as overseas property or investments, from the inheritance tax remit, even if the individual becomes deemed domiciled.