The dictionary definition of domicile is a place of residence. Legally, broadly speaking, it is an individual’s permanent home. The concept has applications in all areas of law, such as marriage, wills and succession. It is also widely used to determine an individual’s liability to various taxes in the UK.
Domicile can be determined in a variety of ways – origin (where you were born), dependency (your parents’ domicile) and choice (where you choose to live). This post will not go into detail about these. Instead it will focus on the fairly recent concept of deemed domicile for tax purposes.
The previous deemed domicile rules applied to inheritance tax (IHT) only. The rules stated that an individual would be liable for UK IHT on their worldwide assets if they had been resident in the UK for 17 out of the last 20 years.
The new rules are a drastic shake-up of the old regime and will apply to all taxes. The time requirements will be reduced and there are harsher rules for returning UK domiciled individuals.
From 6 April 2017, new tax rules will be implemented which mean an individual is deemed domiciled for income, capital gains tax (CGT) and IHT purposes if they meet one of the following conditions:
- They were born in the UK, have the UK as a domicile of origin and have returned to the UK having obtained a domicile of choice somewhere else and have been resident for at least one of the last two tax years: or
- They have been resident in the UK for at least 15 out of the previous 20 years
The purpose of this change is to prevent UK resident individuals from benefiting from non-UK domicile status for an indefinite period. Anyone who is deemed UK domiciled cannot access the old remittance basis for income tax and their worldwide assets will be subject to UK IHT.
For CGT purposes, if a person becomes deemed domicile at the beginning of the 2017/2018 tax year and they are holding foreign assets which will be liable to UK CGT, those assets will be rebased to their market value on 5 April 2017.
The new regime proposes to override existing double-taxation treaties with France, Italy, India and Pakistan unless the other country charges a tax similar to IHT and some tax is actually paid. This would particularly affect UK residents who are currently not deemed domicile in the UK from countries which levy no IHT, such as India, but who will become deemed domicile on 6 April 2017.
This is a complex area, but there are some planning opportunities for both resident domiciled and non-domiciled clients. If you wish to discuss the proposed deemed domicile changes and how they relate to you (including double-taxation treaties or CGT rebasing) please contact the private client department.