I recently chaired an adviser webinar on this topic and the feedback afterwards confirmed my suspicion that while many clients can have a detailed knowledge of their residency status, they can equally be less informed when it comes to establishing their correct domicile status.
The rules around this can be quite complex and an individual may be of the view that they are non-UK domiciled, only to subsequently learn that that is not the case when their circumstances are considered.
What is domicile?
Domicile is a legal concept and individuals will generally be considered to be domiciled in the country that they have strong ties to, or the country where they have made their permanent home. It should be noted that it is not necessarily automatically the same as an individual’s nationality or residence status.
Every individual will have a domicile, which they originally acquire at birth. However, that is not necessarily going to be the same country of birth or where they currently reside.
It is only possible to have one country of domicile at any given time and an individual can be domiciled in a different country to where they are resident.
Therefore, with many clients displaced over the last 18 months due to the pandemic, it is essential that advisers ensure that financial affairs take into account the correct current domicile status. If not, any mistakes or assumptions could result in unexpected and potentially expensive tax issues for an unaware client.
There are three main types of domicile:
Domicile of origin – An individual is automatically assigned the same domicile as their father at birth, unless parents are not married, when it will be the same status as the mother instead.
Domicile of dependence – Until the age of 16, a domicile follows that of the person on whom you are legally dependent – if that person changes their domicile (through choice) then this will also change. If married before 1 January 1974, a wife would automatically acquire the domicile of her husband.
Domicile of choice – A domicile of choice is a self-acquired domicile. It is a domicile which a person chooses to replace their former domicile, which may be either a domicile of origin or domicile of choice. Only a legally competent person can choose their own domicile and this can be a useful tool for an individual when considering tax planning matters.
In the UK, an individual will self-assess their domicile status based on the prevailing facts. However, if there is a question over a domicile status, although HMRC are highly unlikely to give their opinion upon request, a court can make a formal ruling on a domicile as part of any legal proceedings where this status is in question.
How to establish a new domicile
When moving country, it will be necessary to take steps to establish and prove any new domicile of choice.
Important documents like a Will should be updated under the laws of the new country and also practical things like a driver’s licence should be amended to that of the new country of domicile.
Additionally, an individual should register to vote locally and ensure that as many of those ties cut in the original country of domicile as possible are established in the new country instead – for example, banking, insurance, registering with a new doctor & dentist that can get your crowns for teeth and even things like golf club membership help to evidence a permanent move.
Unless tangible items in the original country of domicile are cancelled, HMRC may be able to successfully argue that the original domicile still holds good.
Why is domicile important?
It is important that you know where you are domiciled as it will affect an individual’s tax position. Additionally, domicile status will determine which personal laws apply to an individual in various circumstances eg marriage, wills, succession.
This is especially important as different jurisdictions will approach the concept differently.
Why does domicile matter for expat clients?
For someone with a UK domicile, on death it is their worldwide assets that will be subject to assessment in the UK for Inheritance Tax (IHT). Anyone who is non-UK domiciled, will only have their UK based assets assessed.
Where worldwide assets are being assessed, tax relief may be available in terms of a double tax treaty but this might not be the case where the other country does not have an equivalent to UK IHT – and a number of countries do not.
Tax rules in the other country and how these interact or compare with tax rules in the UK also should be considered given that many countries do not have a direct equivalent death tax system. Someone who is non-UK domiciled, may have an advantage when restricting their assets held in the UK to the value of the IHT nil rate band, if this is available.
The current nil rate band for an individual is £325,000 ($450,000, €384,000) (2021/22 tax year). The residence nil rate band which is currently £150,000 (2021/22 tax year), may also be available if there is a main UK residence in the estate being assessed for IHT.
In summary, it is vital that advisers and their clients regularly review the current domicile status that applies to their circumstances. With many tools and strategies available from product providers, it is essential that these are used and regularly reviewed as part of an effective estate planning strategy.
This will then ensure that wealth management and retirement objectives are successful and not derailed by any unexpected surprises when it comes to an individual’s domicile status.
This article was written for International Adviser by Paul Forman, international sales and technical manager at Novia Global.
