Your domicile is a critical factor when considering UK Inheritance Tax, regardless of where you may be resident.
It is also an important consideration when it comes to planning options for Income and Capital Gains Tax for UK residents. Therefore, it is crucial to understand your domicile position to ascertain any current and future tax burden.
Read on to understand what your domicile position might be.
Four types of domicile
There are various ways in which someone acquires a domicile under UK law:
Domicile of Origin
You normally acquire a domicile of origin from your father when you’re born, and your domicile of origin will often be the country in which you were born.
However, if you were born in a country where your father was not domiciled at the time you were born, your domicile of origin may be your father’s country of domicile.
Domicile of Dependence
Until the age of 16, if your relevant parent’s domicile changed, so would yours as a result of being their dependent. Your domicile of dependence would then supersede your original domicile of origin.
Also, if you were married before 1st January 1974, a wife would automatically acquire the domicile of her husband.
Domicile of Choice
Once a person reaches the age of 16, they can acquire a domicile of choice if they:
- Are living in a country (or territory) other than that of their domicile of origin (or dependency), and
- They intend to remain there permanently or indefinitely.
In practice, it can be difficult to replace a domicile of origin (or dependence) with a domicile of choice. This is particularly true when someone attempts to acquire a domicile of choice in a country where they previously had no connections. It may take significant life changes and many years to build a strong case that your domicile has changed.
This is where someone who is non-UK domiciled is treated as being UK domiciled under certain circumstances.
If this applies, you will be deemed UK domicile for tax purposes, such as for Inheritance Tax. We can distinguish between two types of deemed domiciled individuals:
- ‘Long-term residents’ – individuals who have been resident in the UK for 15 out of the past 20 tax years (including partial tax years). This applies even if there is still no intention to permanently settle in the UK
- ‘Formerly domiciled residents’ – individuals who were born in the UK with a UK domicile of origin who have since acquired a domicile of choice elsewhere, but who have resided in the UK in at least one of the previous two tax years.
The fifth type of UK domicile
Although we have outlined the four main types of domicile, there is a fifth, less common, type which you should also bear in mind.
This is ‘elected domicile’ and is triggered when an individual (for Inheritance Tax purposes) elects to be treated as a UK domicile. This is usually to ensure they are entitled to the full ‘spousal exemption’ on assets being passed to them by their UK domiciled spouse.
Find out more about the limited spousal exemption in our article: 9 key things for international individuals to know about UK Inheritance Tax
Once you have made a domicile election, it cannot be revoked. However, the election will cease once you have spent four successive tax years (all must be post-election) as a non-UK resident.
Why should I understand and plan my domicile status?
Your domicile and residence status will direct where and how you pay taxes.
UK domiciled individuals are subject to Inheritance Tax on the value of their worldwide estates. However, non-UK domiciled individuals are subject to inheritance only on UK assets – most commonly land and property.
Read our Guide to UK Inheritance Tax in order to find out more details on how your domicile position affects your Inheritance Tax position.
Your domicile also affects where and how you pay tax on income or gains arising outside of the UK. You may find our article on the remittance basis useful.
If you do not consider and plan your domicile status you could end up paying more in tax than you need to. Therefore, it is important to ensure you understand your domicile and the implications for your circumstances.
Get in touch
Issues concerning domicile can be complex. Therefore, if your domicile position isn’t straightforward, we would always recommend that you seek specialist advice.
For more information regarding domicile and how this may relate to your situation, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.