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Domicile of Choice and losing your UK Domicile of Origin

Your domicile of origin is, in most circumstances, the country where you were born. Knowing where you are domiciled is vital when it comes to various tax rules and it might be possible to lose your existing domicile for one of your own choice. However, it is complicated. This article provides an overview of the process.

Written on 28 October 2019

When evaluating the location and value of your global  assets, especially if you are a British born national that has resided overseas for a number of years and do not intend to return to reside in the UK, it is important to establish in which country do you consider yourself to be domiciled.

Many British expatriates, even those that have lived in another country for decades will still find themselves (often unknowingly) UK domiciled. The impact and consequence of not being able to shake and loose ones UK domicile will cause their global assets to be made liable to UK Inheritance Tax (IHT) come their untimely demise, the rate of which is 40%.

A UK domicile of origin is notoriously a challenge to lose and in favour of a new country. Even non-British persons that find themselves being UK resident for 15 out of the last 20 tax years will be deemed UK domiciled and come their untimely demise, their worldwide estate can be exposed to UK IHT. Furthermore, a deemed UK domicile person will be liable to UK Income and Capital Gains Tax on their global income and gains!

Client advisers will need to review each client’s individual circumstances, making 100% sure that they and their clients are aware of the consequences of domicile. If there is any uncertainty, if a client’s situation is complex and if a client expresses concern about their estate planning, advisors can quickly explore further courses of action, whether this might involve  a client being certain that they have acquired a Domicile of Choice, or to taking steps to legally reducing the burden of UK IHT.

In this article, we will take a look at the meaning of UK Domicile and how it may be possible to lose this status.

What is a UK domicile of origin?

Your ‘domicile’ is the long-established way of determining to which legal system you belong, i.e. where your permanent home officially is, despite your current nation of habitual and fiscal residency.

A domicile of choice can be acquired by adequately severing ties with the UK, to being a long term permanent resident of an overseas nation and deciding to remain resident for the indefinite future.

An example is in the legal case of Gaines Cooper. Mr Gaines Cooper resided for many years in the Seychelles but maintained substantial ties with the UK, too many to lose his domicile of UK origin, as such his global estate would become subject to UK IHT.

What does the Gaines Cooper Case show us?

If you are drawing conclusions from this case alone, you might conclude that you need to dispose of all UK assets, investments, connections and livelihood, before having a hope of acquiring a new domicile of choice. Actually, the important factors that this case shows us is that you have to be a both, a long-term resident for the overseas country and intending to stay there permanently; one without the other just won’t cut it.

There was a perceived intention that Mr Gaines Cooper planned to return to the UK periodically, where his family lived and many of his investments were located. As such, HMRC felt he did not intend to reside in the Seychelles indefinitely. This case was not just about the scale of the assets Mr Gains Cooper owned in the UK (which, no doubt, had an impact) but that his residence in the Seychelles was not deemed to be his indefinite place of central, vital and chief residence.

UK IHT rates applicable to UK domiciled and deemed UK domiciled persons

Global assets owned by UK domiciled and deemed UK domiciled persons will be liable to 40% of UK IHT come their demise. Even a family main residence will eventually be subject to UK IHT. The same taxpayers are able to enjoy a nil rate band before calculating any liability but this has been stagnant for many years and the allowance is just £325,000

Non-UK residents that are still UK domiciled could still find themselves being liable to taxation in their country of residence, with many other countries having their own version of IHT, even gift tax, wealth tax, estate duty and other liabilities. Alarming as this might be at first glance, in the cases of France, Italy, India and Pakistan, the UK should apply a credit for taxation already paid due to special double tax treaties and specifically applicable to inheritance.

Acquiring a Domicile of Origin?

In order to lose your UK domicile of origin in favour of a new domicile of choice, the following should be at least be undertaken:

  • Physically reside in your new domicile of choice and at least for 4 permanent years
  • Genuinely intend to live there permanently, with no reason for anyone to suspect you intend to live anywhere else or to seek to return to the UK
  • Sever ties with the UK in favour of your new domicile

If you do not have a UK domicile of origin, you may still be subject to UK IHT, especially if you have been resident of the UK for 15 out of the last 20 tax years

Domicile becomes extremely important to advisers and their clients, since UK domiciles are subject to UK Income Tax, UK Capital Gains and eventually UK IHT on their global income, gains and assets

When to consider requesting advice regarding your domicile

Understanding domicile can be complicated, particularly when it comes to addressing IHT mitigation, succession, asset and wealth protection.

If there is scope to acquire a new domicile of choice , especially if there is a significant amount of potential UK IHT at stake, you should always seek professional advice and to rely on experts that can obtain a written ruling to verify that, for example, a former UK tax payer has acquired a domicile of choice.

It is not complicated, expensive  and time consuming in regard to assessing a client’s domicile and if it is certain amongst our own experts that a candidate has, in their view, acquired a new domicile of overseas choice, duly shaking and losing their UK domicile, the IHT savings,  come an unexpected demise can be substantial. Following a ruling, duly verifying a new domicile, the same candidate can establish an overseas trust, settle, for example, overseas assets to the same trust, enjoy being a main beneficiary for their lifetime, even enjoying the assets of the trust, however come their demise, the assets should not be exposed to UK IHT and the balance of assets can be held, accumulated and/or distributed in part or total to surviving beneficiaries

For further information and initial advice to be offered by our experts without obligation do make contact with us and provide some useful background information about your circumstances

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