Domicile and Tax - All you need to know
Behind UK tax residency rules, the concept of domicile is key to determining how much tax you pay, and can have a huge impact on whether you’re subject to the 40% inheritance tax charge. If you’re UK tax resident, it can also have a huge impact on much income tax and capital gains tax you’ll need to pay in the UK.
Domicile is a legal term used to define your ‘home country’, or ‘where you are from’. Domicile is separate to your residence, citizenship or nationality and is not automatically reflective of the country you live in or the country you were born in.
Domicile types
There are different types of domicile but it’s usually only possible to have one country of domicile at a time. Working out where you’re domiciled can be complex and a number of factors need to be considered.
There are 3 main categories of domicile:
Domicile of origin - This is acquired at birth and is usually based on the domicile of your father (though it can be based on your mother’s domicile if your parents weren’t married at the time of your birth). If your circumstances remain unchanged, you’ll typically retain your domicile of origin for life.
Domicile of dependence - This domicile is acquired which happens, generally, if your father’s domicile changes before you reach 16 years of age. Again, this can depend more on your mother’s domicile if your parents weren’t married.
Domicile of choice - You can acquire a domicile of choice in a certain jurisdiction if you choose to and are willing to cut ties with your domicile of origin. Changing domicile is a very significant step and you will need to show that you have left your original home country behind you forever and chosen another country which is going to be your permanent home for the rest of your life. The onus is on you to prove that you have acquired a domicile of choice in another country. There is a lot of detailed case law covering this area and professional advice should always be sought around this.
Beyond the 3 legal domicile categories, there is a further ‘deemed domicile’ to consider specifically for tax purposes - A person who has been resident in the UK for 15 out of the most recent 20 years is deemed to have acquired a UK domicile for tax purposes.
Domicile - Income Tax & CGT
Your domicile status determines how much UK tax you need to pay. If you are UK resident and UK domiciled you will pay UK tax on all worldwide income and gains as they arise, regardless of whether the income and gains stay outside of the UK. On the other hand, if you are UK resident but not domiciled in the UK, you can elect to be taxed on the ‘remittance basis’ where you are only taxed on UK sources of income/gains, plus any overseas income/gains that you bring in to the UK.
There are currently proposed changes for non-doms due to come in to effect from April 2025 which will significantly change how don-doms will be taxed.
Domicile - Inheritance Tax
Domicile is a key factor in assessing how much UK Inheritance Tax is due on your Estate when you pass away.
Inheritance Tax is due in the UK on all worldwide assets when you are domiciled in the UK. Inheritance usually applies at a rate of 40% on your estate in excess of the £325,000 ‘nil-rate-band’ and £175,000 ‘residence-nil-rate-band’ where available.
UK Inheritance Tax is generally due only on assets held in the UK when you are not domiciled in the UK. Overseas assets can often outside the scope of UK Inheritance Tax.
Deemed UK domiciled
You may also be ‘deemed UK domiciled’ depending on how long you’ve been resident in the UK. From 6 April 2017, long-term UK tax residents with a non-UK domicile of origin are deemed to be UK domiciled once they’ve been a UK tax resident for 15 out of the 20 previous tax years.
Losing your UK domicile
Domicile is extremely difficult to change and losing a UK domicile is a complicated process. The burden of proof will lie with you that you have replaced your UK domicile of origin with a domicile of choice elsewhere. If you’re a British expat who has lived abroad for many years you may assume that you’ve automatically lost your domicile – but this is unlikely to be the case.
The process of changing your domicile requires you to provide clear evidence of your intention to permanently leave the UK and settle elsewhere. There are three key that may be considered (among others):
Long-term residence abroad: You need to be able to demonstrate that you have a clear intention to live permanently or indefinitely in another country.
Severing all UK ties: You need to be able to demonstrate your intention that you will never reside in the UK again. If you remove all ties to the UK – selling property, closing bank accounts, and moving all financial links – you might be able to provide evidence that you’re permanently leaving the UK. Believe it or not, HMRC will look at a huge number of factors such as where you wish to be buried and whether a grave plot in the new country of choice has been purchased!
Formal declarations: It is sensible to write a domicile statement declaring your intentions to leave the UK permanently and reside in another country for the rest of your life. In addition, you may consider renouncing your British citizenship in favour of the country which is now your permanent home.
Losing your UK domicile is possible, but it’s very hard to do and you should always seek specialist advice. A domicile review can help you understand what your exposure to UK tax is.
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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.