Most countries do not have the concept of domicile, they use residence and/or citizenship to determine personal tax matters. These three constructs are legally different – it is entirely possible to be resident in one country, a citizen of another, and domiciled in a third country, all at the same time.
There is no single legal definition of domicile; it is broadly the country with which you have the most significant tie(s). Everyone is born with a domicile of origin, which is the domicile of your father if your parents were married, or the domicile of your mother if not. From the age of 16 it is possible to change to a new domicile of choice, but this is more difficult than is commonly supposed – in the words of HMRC:
“The laws of the UK make it clear that domicile is not easily changed, and so it is unlikely that an adult‘s operative domicile will alter unless the individual makes profound and extensive changes to his or her lifestyle, habits and intentions.”1
“The burden of proving a change of domicile rests with the party that asserts the change… A change of domicile is never to be lightly inferred, particularly a change from a domicile of origin to a domicile of choice, which is regarded by the courts as a serious step requiring clear and unequivocal evidence.”2
In practice, severing ties to the UK and spending a long period as an expatriate is not enough to displace a domicile of origin – new ties to the domicile of choice need to be formed, such as a declared intention to live in a country permanently or indefinitely. If you work for many years in Hong Kong, but do not intend to spend your retirement here, you will not have established a domicile of choice here.
If you do intend to spend your retirement in Hong Kong, but then your plans change and you move to e.g. Australia, your domicile of origin will immediately revive and the process of establishing a new domicile of choice will begin all over again – you cannot have a domicile of choice in a country until/unless you are living permanently there.
An individual’s domicile can therefore be ambiguous, and in the event of a dispute can only be settled by the courts. In the past, it was possible to obtain a domicile opinion from HMRC, but they stopped doing this some years ago, and have since stated that even if they did, it was relevant only for the tax year in which it was promulgated (e.g. see the well-known case of Stuart Gulliver, formerly of HSBC3).
In the last few years, HMRC have increased the number of their domicile enquiries, usually where an individual with a UK domicile of origin has asserted a change of domicile, or where their family have after the death of the individual. In their own words again:
“During the course of any enquiry in this area personal information will have to be obtained and reviewed. In more complex cases the nature and extent of such information can be extremely wide ranging, deeply personal, time-consuming to provide and involve not only the individual but also family and close friends.”4
Domicile is relevant to events such as divorce and succession, but it also affects personal taxation, both during life and upon death. In the latter case, UK domiciled people are subject to inheritance tax (IHT) on their worldwide assets. UK-situated assets are always subject to IHT upon the death of the owner, regardless of their domicile, because they are in the UK.
During life, UK resident and domiciled individuals are subject to tax on their worldwide income and gains, and if they settle discretionary trusts they can be subject to immediate IHT charges, at half of the death rate, i.e. 20%.
UK resident non-domiciled individuals can take advantage of the remittance basis, which means that they pay UK taxes on their UK-sourced income and gains, and on any income and gains that they remit into the UK, but not on income and gains that they keep outside the UK.
If a non-domiciled individual is UK resident for 15 years in any 20 year period, they become deemed UK domicile, which means they can no longer use the remittance basis. It also means that their non-UK assets are brought into the UK IHT net. It is of course possible to acquire a UK domicile of choice before the 15 year point if the individual moves to the UK with the settled intention to stay there permanently/indefinitely.
It is possible to protect non-UK assets from falling into the IHT net through the use of an excluded property trust; if you would like to know more, please speak to your financial adviser.
Article provided by Jason Pearce, Head of Technical Sales, Hong Kong & NE Asia, Quilter International
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3 Gulliver v HMRC (2017) UKFTT 222 (TC)