The importance of domicile for UK non-doms and long-term UK expats

Individuals moving to or from the UK often overlook the importance of their ‘domicile’ status. Domicile is a concept that is distinct from ‘residence’ and failing to understand and clarify your domicile status can have substantial tax implications, writes Stuart Stobie, Managing Director of Sovereign Corporate & Trustee Services (SCATS) Ltd.

So, what exactly is domicile? Under UK law, every individual possesses a domicile status and it’s impossible to hold more than one domicile at any given time. There are three types of domiciles:

• 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.

If you are UK domiciled, you are liable for UK tax on your worldwide income and gains. You are also subject to UK inheritance tax (IHT) on your global assets, regardless of their location. If you are non-UK domiciled, you are only subject to UK tax on income and gains generated in the UK or remitted back to the UK. Non-doms are also only liable to IHT on UK-based assets.

However, non-dom status does not last indefinitely. Individuals who have been UK tax resident for at least 15 out of the previous 20 tax years will be deemed to have become UK domiciled (the ‘15/20 rule’) for tax purposes.

Many UK nationals who have lived abroad for a long time may also 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 may well remain liable to UK IHT on their worldwide assets.

In other words, for foreign nationals living in the UK and for UK nationals living overseas it is not enough to consider your residence for tax purposes, you must also consider – and get clarity on – your domicile status.

There are a number of effective tax planning options available to UK-based non-doms before they become UK domiciled, as well as to UK nationals living overseas on a long-term basis. This edition of the Sovereign Report contains an article by Sovereign chairman Howard Bilton addressing the latter.

We strongly recommend that any UK-based non-dom or long-term UK expat who has any doubt about their domicile should seek expert advice at the earliest opportunity.