Contributed by Calibrate Law, United Kingdom

Why is domicile important?

An individual’s domicile position dictates their exposure to UK inheritance tax (“IHT”), which is charged at a rate of 40% on their chargeable estate in excess of their nil rate band (currently £325,000).

A UK domiciled person is subject to IHT in respect of their worldwide assets, regardless of where they are living and tax resident at the time of their death. There is therefore a risk that British ex-pats residing abroad may unknowingly retain a UK domicile, such that their worldwide estate remains within the scope of IHT on death.

On the contrary, a person domiciled outside the UK will only be subject to IHT in respect of their UK situated assets.

What is Domicile?

Domicile is a common law concept which is not defined in UK tax law. An individual may have only one legal domicile at any given time which denotes the country or state they regard as their true homeland, often described as the country in which they intend to die. Domicile does not necessarily correspond with either residence or nationality in any given year and is essentially a question of legal fact.

STARTING position - DOMICILE OF ORIGIN

Domicile of origin is the default domicile.  An individual acquires such a domicile at birth, which, in the case of a child born in wedlock, follows that of their father at that time.  A child where their parents are unmarried, or a child born after the father's death, takes their mother's domicile.

A domicile of origin will not necessarily accord with the country in which the individual is born. Whilst an individual's domicile of origin can be superseded by a domicile of choice, it cannot be extinguished and can come back into play should a domicile of choice be lost at some future date.

DOMICILE OF CHOICE

It is possible to supplant a domicile of origin with a domicile of choice although this can be difficult to achieve.  Broadly, there are two conditions to be satisfied: an individual must:

  1. take up residence in another country by being physically present there, and
  2. have settled there with the intention of making that country their home permanently or indefinitely.

In practice, this means that if residence outside of the UK is subject to an important and realistic contingency, an individual will not be taken to have decided to live outside the UK permanently or indefinitely.  Whilst each case will differ, possible contingencies can include an intention to return to the UK on retirement.

A domicile of choice, if lost, will cause the domicile of origin to revive unless, or until, a new domicile of choice is acquired.

How we can help

In recent years we have seen HMRC take an increasingly aggressive stance when reviewing the domicile position of British nationals residing abroad. It is therefore very important that advice is taken as early as possible. Following a detailed fact finding interview with clients, we can provide a formal opinion as to whether their UK domicile of origin has been displaced in favour of another domicile of choice.  This opinion would then serve as a defence file if the individual’s estate is ever enquired into by HMRC.

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