For almost a decade, HM Revenue & Customs (HMRC) has been reluctant to challenge claims to foreign-domiciled status, particularly in an individual’s lifetime, given the UK’s self-assessment regime.
However, recent years have seen a significant variance from this position, with the number of domicile enquiries increasing quickly, and the amount of HMRC attention devoted to them, writes David Denton, international financial services specialist at Quilter.
So why are domicile enquiries increasing?
Various factors have contributed to this, including a general dislike in the court of public opinion on all matters considered ‘offshore’, political pressure on HMRC to improve tax collection, and a perception that, historically, a significant number of long-term UK residents claiming to be foreign domiciled may have poor grounds for such a claim.
Warning shot
This is clearly evidenced by the introduction in 2017 of the formerly domiciled resident (FDR) status, effectively nullifying excluded property trusts for those born in the UK, with a domicile of origin, who subsequently believe their domicile has changed, before returning to the UK.
A shot across the bows, if ever there was one.
Also susceptible to investigation include UK arrivers, evidencing a strong intention and lifestyle to remain, who may have inadvertently acquired a UK domicile of choice, meaning that relying upon the 15/20 year rule before acquiring a deemed domicile may be inadequate.
And given that challenges are invariably onerous, HMRC stating that there will be an ‘in-depth investigation into one’s background, lifestyle and intentions … extending to areas that one would not normally think are relevant to one’s tax affairs’, one would do well to remember that the ‘burden of proving a change of domicile rests with the party that asserts the change’.
Five different types
There are, since 2013, five types of UK domicile, and a number of ways they can be acquired.
1. Domicile of origin
This is the domicile that is acquired at birth. It is normally taken from your father; however, if parents are unmarried or the child is born after the father’s death, then the mother’s domicile is normally acquired.
It is important to note that the domicile of origin can differ from the country of birth, as it follows the domicile of the relevant parent.
For example: Rebecca and James (married, resident and domiciled in the UK) migrated to Canada for Rebecca’s employment on a five year contract.
Some years later, their son Ben is born. Ben is Canadian and British in nationality but, as James hasn’t acquired a domicile in Canada, Ben has a UK domicile of origin even though he has not stepped on UK soil.
Under the general law, an individual will retain their ‘domicile of origin’ until a different domicile is acquired – either a ‘domicile of dependency’ or a ‘domicile of choice’.
2. Domicile of dependency
A child’s domicile will follow the person on whom they are legally dependent.
So, if the domicile of that person changes, the child’s domicile will change and replace the domicile of origin. If the father’s domicile changes after the birth of the child, the child follows the new domicile as a domicile of dependency.
This happens until the child reaches 16.
So, if Rebecca and James decided to stay in Canada, and James acquired a domicile of choice there before Ben reached 16, their son’s domicile will change accordingly.
Ben’s new domicile of dependency will replace his domicile of origin.
3. Domicile of choice
An individual can try to acquire a new domicile – a domicile of choice – by settling in a new country with the intention of living there permanently or indefinitely.
However, it is very difficult to acquire a new domicile as there are no fixed rules or requirements and the burden of proof falls on the individual to prove they have acquired a new domicile.
Living in another country for a long time, although an important factor, does not prove a new domicile has been acquired. There also needs to be clear evidence of the individual’s intention to live there permanently or indefinitely.
As well as considering an individual’s long term intentions, HMRC make a judgement after reviewing the ties with the domicile of origin and those with the domicile of choice.
Disposing of assets in the country in which you were previously domiciled may help support a claim. It is unlikely that a domicile of choice will be acquired if there are still ties – other than insignificant ones – with your domicile of origin.
Back to James and Rebecca
Many years later, having left Canada, Rebecca and James move to Hong Kong and acquire permanent residency status. They have very few ties with the UK.
However, as they cannot acquire a ruling from HMRC, and recognise that, and for health or family reasons, many expatriates invariably return to the UK, they decide to continue planning as if they are UK domicile for the sake of Ben’s eventual inheritance.
4. Deemed domicile
Non-UK domiciled individuals who have been UK resident for 15 of the previous 20 tax years become deemed UK domiciled for all tax purposes.
For instance: Michelle, a Singaporean, first moved to the UK for undergraduate studies but has continued residing in the UK ever since.
She has been residing in the UK for the past 20 years and married her long-time boyfriend Daniel. For UK inheritance tax (IHT) planning purposes, Michelle will be deemed a UK domicile.
5. Elected domicile
Since 6 April 2013, a non-domicile person married to a UK domicile person has been able to elect to be treated as a UK domicile for UK IHT purposes.
As an example: Andrew married Mika, who is Japanese, when he was working in Japan.
After several years, Mika and Andrew decide to move to the UK. For UK IHT planning purposes, as it is a mixed domicile marriage, the spousal exemption – from domicile to non-domicile spouse – is limited to £325,000 ($404,676, €372,262).
However, Mika can elect to be a UK domicile to enjoy full spousal exemption.
As such, Mika and Andrew can transfer assets between themselves freely. IHT will only be payable on the second death.
Plan for the worse
The ongoing challenge for financial advisers is to review a client’s individual circumstances and ensure that a client is
aware of what their current domicile is and if any uncertainty prevails, what steps, if any, can be taken to remove this uncertainty, or to plan to reduce the estate accordingly.
It is always advisable to plan for the worst and hope for the best, so that a negative posthumous determination by HMRC does not reduce an inheritance.
This article was written by David Denton, international financial services specialist at Quilter.
