Understanding domicile status as a UK national

03 November 2023

Understanding domicile status as a UK national

Long-term UK expats often overlook the significance of their ‘domicile’. Domicile is a concept that is distinct from 'residence' and failing to understand and clarify your domicile can have substantial tax implications.

What is domicile?

Under UK law, every individual possesses a domicile, and it is impossible to hold more than one domicile at any given time. There are three types of domicile:

Domicile of Origin – acquired at birth and typically based on the father's domicile. It can only be altered subsequently by adoption or by acquiring a new domicile of choice.
Domicile of Dependence – the domicile ascribed to an individual who is legally dependent on another person.
Domicile of Choice – acquired through the combination of having a physical presence in a legal territory outside the UK as an actual resident and having the intention to remain in that territory permanently or indefinitely.

Implications of domicile

Many UK nationals who have lived abroad for a long time may assume their liabilities to UK tax have ended. They may no longer be liable to UK tax on non-UK sourced income and gains but unless they have replaced their UK ‘domicile of origin’ with a foreign ‘domicile of choice’, they will l remain liable to UK inheritance tax (IHT) at 40% of the total value of their worldwide estate (after exemptions).

Changing domicile

It is difficult to change your domicile. The default position is that those who acquired a UK ‘domicile of origin’ at birth (99% of all UK nationals born in the UK) will keep that UK domicile for their entire lives – and with it their liability to UK IHT. But it is possible for UK persons to acquire a new ‘domicile of choice’ in their new country of long-term residence – and it can be highly advantageous to do so.

Legally, the test (and there is only one) is simple. Has the taxpayer formed the intent to remain in their new country indefinitely? If the answer is ‘yes’, that person is now domiciled in their new country of residence. All the facts and circumstances are evidential but none of them are determinative apart from the test of ‘intent’.

Demonstrating ‘intent’

Convincing the UK tax authority (HMRC) is not so straightforward. It is therefore essential that steps should be taken during the expat’s lifetime to properly document their intentions and obtain an opinion from UK Counsel that a new domicile has been acquired. It will be immeasurably harder for their executors or beneficiaries to do this after their death.

It used to be the case that HMRC would confirm a domicile. It will no longer do so. However, a UK Counsel’s opinion will rarely be challenged unless the facts and circumstances have changed, or it was obtained under false pretences. A UK Counsel’s opinion therefore provides the best possible protection.

HMRC is unlikely to agree that a new domicile has been acquired during the first six or seven years that a taxpayer is living abroad. After that, if the facts and circumstances corroborate the statement of intent, there is a good chance that a new domicile has been or can be acquired. It is typically necessary to show permanence in the new country by acquiring property and establishing social and economic ties.

Losing such ties in the UK is also very helpful but it is not essential. Owning UK residential property, for instance, is by no means fatal. It is only necessary to show that the taxpayer has greater connections with their new country of residence than he or she has retained with the UK. But still, it is only the question of intent that is determinative in law.

For HMRC, an important aspect of the existence, or otherwise, of the necessary intention to remain in the current country of residence indefinitely is whether there is a contingency that the individual’s residence in a particular territory is anticipated to end.

If there is an intention to return to the domicile of origin on a “clearly foreseen and reasonably anticipated contingency”, then there is no intention to remain indefinitely. However, if the contingency is “vague or sufficiently conditional”, an intention to remain indefinitely could exist and a domicile of choice can be acquired.

The ‘domicile of origin revival trap’

Even where a long-term UK expat has established a new domicile of choice in their current place of residence, if they leave that country and move their residence to another country, they will lose their new domicile of choice and revert to their UK domicile of origin.

This revived UK domicile will remain in place until such time as they have resided in the new country for sufficient time to claim a new domicile of choice. That is likely to take several years, and in the meantime, they will once again be liable to UK inheritance tax (IHT) on the total value of their worldwide estate.

What steps should long-term UK expats take in respect of domicile status?

A long-term UK expat who has resided in their current country of residence for six/seven years or more and has the intention to remain there indefinitely, should:

Prepare a statement of their intention to remain in their current country of residence indefinitely.
Compile a file of supporting evidence to corroborate this statement of intention.
On the basis of the statement and file, obtain a written opinion from UK Counsel confirming their acquisition of a domicile of choice.

A long-term UK expat who has resided in their current country of residence for six/seven years or more and has the intention to remain there indefinitely but who might move to a third country in the future, should:

Complete steps 1 to 3 as above, and also then take the opportunity to transfer the bulk of their assets into trust – non-UK sited assets that are placed into trust while the transferor has acquired a domicile of choice will not form part of their UK taxable estate for IHT purposes even if the transferor moves to a third country and revives his/her UK domicile of origin. This exclusion will not apply, however, if the transferor returns to the UK.

A long-term UK expat who intends to return to the UK at some point in future, should immediately initiate planning to minimise their UK IHT liability:

Potentially Exempt Transfers (PETs) have the possibility of being completely exempt from IHT if the donor survives the gift by more than seven years, otherwise tax is charged on a sliding scale basis known as taper relief. For a death within the first three years, IHT is charged at 40%. The tax payable then reduces by 20% on each anniversary after the third year.
A ‘Family Investment Company’ (FIC) provides a mechanism for retaining control of assets while their value, or most of it, is transferred. The gift of the shares to other the family members should qualify as a PET and therefore should not fall within the founder’s estate after seven years from the date of the gift (and will benefit from taper relief from the fourth year). In addition to IHT benefits, FICs can also offer significant income and capital gains tax benefits.

Why act now?

It seems inevitable that the next UK government will be formed by the Labour party. Labour has already announced that it intends to close what it considers to be loopholes in the current tax legislation that enable wealthy individuals to avoid paying IHT. One of the easier measures they could introduce is to make all UK passport holders subject to UK IHT, whether or not they remain domiciled in the UK. Planning is bound to get harder.

Good IHT planning takes time, so we believe it is now extremely urgent to take advantage of the current legitimate opportunities to plan out the tax. Tax changes are rarely retrospective so any changes implemented under a new UK government would not ordinarily affect planning that has already been undertaken. But it may well remove any opportunity to plan in the future.

IHT planning will benefit any UK national who has a net worth in excess of £1 million. Of course, this type of planning will not benefit the individual directly because their estate will only become liable to IHT upon their death. However, most people would prefer to leave what they have to their nearest and dearest rather than volunteering an additional amount to the UK Treasury.

Our advice is firm and unequivocal. Get certainty on your domicile and plan now while it is still possible, or risk losing it.