Domicile and the new deemed domicile provisions

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By Duncan McKellar, Tax lecturer

25 February 2019

Domicile is one of the determinants of an individual’s liability to UK tax. As of 6 April 2017, new provisions relating to ‘deemed domicile’ came into effect. This article looks at the concept of domicile, the new deemed domicile rules and how domicile can affect an individual’s tax liability.

What is domicile?

Along with residence, domicile is one of the key determinants of an individual’s liability to UK tax. Residence is determined by the statutory residence test; however, domicile does not have a statutory definition.

It is often described as an individual’s ‘permanent home’ and may therefore differ from an individual’s residence status. Residence is determined largely by the number of days spent in the country in a given tax year and may therefore change year on year.

Unlike residence, it is only possible to have one domicile at any one time.

How is domicile established?

Historically there have been four types of domicile: domicile of origin, of dependence, of choice and deemed domicile.

  • Domicile of origin is acquired at birth, normally being the father’s domicile, however, the mother’s domicile is used where the parents are not married. In Scotland, domicile of origin may be determined by the Family Law (Scotland) Act 2006, s22.
  • Until an individual turns 16, their domicile will follow that of the person on whom they are legally dependent; this is a domicile of dependence.
  • A domicile of choice can be established by individual’s over the age of 16. This change of domicile is notoriously difficult to prove as there must be an intention to permanently settle in a new country.
  • Deemed domicile has been a concept for inheritance tax (IHT) purposes for a number of years and applied until 5 April 2017 where an individual was resident in the UK in 17 of the previous 20 years or was domiciled in the UK within the three tax years immediately preceding the year in question.

New rules on deemed domicile (what has changed)

As of 6 April 2017, the concept of deemed domiciled has been changed for IHT purposes per s.30 FA (No.2) Act 2017 and has been introduced for the purposes of both Income Tax (IT) and Capital Gains Tax (CGT) at s.29 FA (No.2 Act 2017).

The new rules for IHT purposes deem an individual to be UK domiciled if:

  • they were domiciled in the UK in the three years immediately preceding the tax year in question (as before).
  • they were resident in the UK for at least 15 of the previous 20 tax years immediately preceding the tax year in question and they are resident in the tax year in question or one of the last four tax years.
    In this instance UK domicile resumes from 6 April in the year after the one in which the 15 out of 20-year test is met. This is a change from the 17 of the previous 20 tax years rule.
  • they have had a UK domicile at birth and have subsequently lost this but begin to be UK resident once again. In this instance, UK domicile will begin from 6 April in the second tax year of residence i.e. there is a year of grace. This is a new definition of deemed domicile.

For IT and CGT purposes, the deemed domicile rules are slightly different and there are only two categories instead of three. An individual is deemed UK domiciled for IT and CGT purposes if:

  • they have had a UK domicile at birth but have subsequently lost this and begin to be UK resident once again. This is the same rule as above for IHT however the domicile start date is different as it is 6 April in the first tax year of residence (no year of grace).
  • they were resident in the UK for at least 15 of the previous 20 tax years immediately preceding the tax year in question and they are resident in the tax year in question or one of the last four tax years. This is the same rule as for IHT above with the same domicile start date.

There is no equivalent ‘three-year rule’ for IT and CGT.

Why does it matter?

Domicile is only relevant for tax purposes if an UK-resident individual has either overseas income, gains or assets.

Where an individual is UK resident and domiciled they are taxable on their worldwide income and gains and their worldwide estate may be subject to IHT.

Non-domiciled individuals are treated differently to UK-domiciled individuals for both IT/CGT and for IHT purposes.

A non-domiciled and UK-resident individual can elect to be taxed using the remittance basis for IT and CGT purposes and thus avoid paying UK tax on unremitted income and gains.

In absence of such an election the individual will be taxed on the arising basis on worldwide income/gains.

Long-term residents will also need to be aware of the new deemed domicile rules as they may find that they become deemed domicile.

Long-term residents are subject to annual tax charges for using the remittance basis of £30,000 (resident in at least seven of the previous nine tax years) or £60,000 (resident in at least 12 of the previous 14 tax years).

As of 6 April 2017, long-term residents will also need to be aware of the new deemed domicile rules as they may find that they become deemed domicile in their 16th tax year of residence and therefore the remittance basis will no longer be available to them.

A non-domiciled individual may ignore non-UK sited assets for IHT purposes when considering possible tax charges on transfers of value. Non-UK assets are known as ‘excluded property’.

A deemed UK domicile may be an advantage to certain couples where the previous limit on exempt spousal transfers was an issue.

In addition, non-domiciled status may affect the spousal transfer exemption for IHT purposes as transfers to a non-UK domiciled spouse or civil partner are limited to £325,000. The exemption for transfers to UK-domiciled spouses is unlimited.

Again, long-term residents need to be aware of the new deemed domicile definition as they may want to consider the effect on their non-UK assets in advance of assuming a deemed UK domicile.

Conversely, a deemed UK domicile may be an advantage to certain couples where the previous limit on exempt spousal transfers was an issue (there was previously a fix for this in which the non-domiciled spouse could elect to be treated as UK domiciled for IHT purposes only, but this may now be unnecessary for long-term residents who become deemed domiciled).

Conclusion

The concept of domicile can be difficult to explain to taxpayers and the deemed domiciled conditions do not make this any easier. However given that domicile should only be an issue to taxpayers with non-UK assets many people will be unaffected by these changes.

Care should be taken for any taxpayers with foreign property.

Note that if an individual is caught by the deemed domicile rules it is possible to lose this status again. The method of losing a deemed domicile will depend on which category they fall in.


This article originally appeared in the July / August 2018 edition of CA Tax

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