Domicile and its importance for tax purposes

What is domicile?

Domicile is the concept in international law which links every individual to a particular legal system. That legal system is the legal system applying in that individual's permanent home or domicile.

Why is domicile important?

Many people are internationally mobile. It is therefore essential to have a way of establishing which system of law and which country's courts governs questions relating to an individual's civil status (such as marriage, divorce and legitimacy) and some aspects of property ownership (such as the devolution of moveable property on an intestacy).

The concept of domicile provides the link between an individual and a jurisdiction.

Domicile is a neutral rule of law for determining the legal system with which an individual has the most appropriate connection. Domicile's main feature is that it attempts to connect a person so far as it is possible with the country in which he or she has a permanent home or in which he or she lives indefinitely.

In addition to the basic principle outlined above, the law of domicile is used by many jurisdictions to determine an individual's liability to tax.

An individual is domiciled in a particular legal system which might not be a country. In the United Kingdom an individual is domiciled in Scotland, Northern Ireland or England & Wales. (Wales does not have a separate legal system - it shares its legal system with England.) In the USA an individual is domiciled in a specific state.

Domicile of origin

When you’re born, you acquire a domicile of origin, normally from your father. This will often be the country in which you were born. However, if you were born in a country and your father was not domiciled there at the time you were born, then your domicile of origin may be your father’s country of domicile. So, the fact you were born in the UK doesn’t automatically mean that your domicile of origin is here.

If your parents were not married at the time of your birth, or your father is deceased before your birth, then you would acquire your domicile of origin from your mother.

Domicile of choice

On attaining age 16 the individual can shed the domicile of origin and acquire a domicile of choice.

The individual can retain this domicile of choice indefinitely.

Alternatively he/she could acquire another domicile of choice.

The individual could abandon the domicile of choice without acquiring a new domicile in which case the domicile of origin will revive.

The acquisition of a domicile of choice involves satisfying a "two pronged" test.

(a) the individual must physically reside in the new jurisdiction, and

(b) the individual must form the intention to live permanently or indefinitely in the new jurisdiction having no real intention of living anywhere else.

The first part of this test is easy to "prove"; the second incredibly difficult.

The Courts have considered the acquisition of a domicile of choice on many occasions.

"A domicile of choice is acquired when a man fixes voluntarily his sole or chief residence in a particular place with an intention of continuing to reside there for an unlimited time."

“I accept that statement ... with this qualification only that the expression “unlimited time” requires some further definition. A man might move to another country because he had obtained employment there without knowing how long that employment would continue but without intending to reside there after he ceased to be employed. His prospective residence in a foreign country would be indefinite but would not be unlimited in the relevant sense"

Domicile of dependency

As mentioned above children who have not yet attained age 16 have the domicile of their father (or mother if the child is illegitimate).

The domicile rules set out above apply equally to married women where the marriage took place on or after 1 January 1974.

Marriage of itself does not cause a change in domicile. However a decision made by a non-UK domiciled individual to marry someone domiciled in the UK and set up a home in the UK could be evidence of an intention to live permanently or indefinitely in the UK.

Where, before 1 January 1974, a married woman had a non-UK domicile of choice and married a UK domiciled individual she acquired a UK domicile of dependence. On 1 January 1974 this domicile of dependence was converted to a domicile of choice by operation of law (and not on general principles).

This is a difficult area of law and specialist legal advice should be taken where the domicile status is relevant.

Deemed domicile

Before 6 April 2017 you were UK domiciled if you were resident in the UK for 17 of the 20 years of assessment ending with the year in which the relevant time fell.

From 6 April 2017 you became UK domiciled if resident in the UK for 15 of the 20 years before the relevant year.

Additionally, from 6 April 2017 there was a new category of deemed domicile – ‘formerly domiciled resident’. Essentially the government wished to make it harder for individuals who had a UK domicile at the date of their birth to claim non-dom status if they leave the UK and acquire a domicile of choice in another country but subsequently return here.

An individual who was not domiciled in the UK was not liable to IHT on any of their property situated outside the UK (excluded property). Similarly, non-UK situated property held in a trust was excluded property if the settlor was not domiciled (or deemed domiciled) at the time the property became comprised in the trust  (an ‘excluded property’ trust).  

Taxation of non-uk domiciles from 6 April 2025

The government have abolished the remittance basis of taxation for non-UK domiciled individuals and replaced it with a simpler and internationally competitive residence based regime, which will take effect from 6 April 2025. Individuals who opt-in to the regime will not pay UK tax on foreign income and gains (FIG) for the first four years of tax residence.

From 6 April 2025 the government introduced a new residence based system for IHT, ending the use of offshore trusts to shelter assets from IHT.

The test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. The time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years. 

Subject to transitional points, the excluded property status of non-UK settled assets will not be fixed at the time the assets are added to a settlement. Instead, they will only be excluded property (and so not subject to IHT charges) at times when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT.

Where the settlor of a trust dies on or after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at their death; if they were not long-term resident when they died then non-UK settled assets will be excluded property and if they were long-term resident at death then all UK and non-UK settled assets will be in scope for IHT for the duration of the trust.

If a donor created a settlement from which they can benefit (even if the property was settled when they were not long-term resident), the property comprised in the settlement which is, or represents, the gifted property will be chargeable under the Gift with Reservation rules if they are long term resident at their death (or when the reservation ceases within 7 years of death).

Where non-UK assets comprised in a settlement were excluded property before 30 October 2024, these will not be subject to the GWR rules. Where applicable, such settlements will still be within the relevant property regime and charges  apply from 6 April 2025. 

The government issued a technical note concerning reforming the tax of non-UK domiciled individuals which outlines the changes from April 2025.