There has been much discussion in the press regarding the introduction of a statutory test for residence. The test is welcome and should provide a greater degree of certainty for clients in the context of their UK tax status. It should however be remembered that residence is not the only factor which affects liability to UK taxation. Domicile is an entirely separate concept for which there is no decisive test.
Domicile is a concept of private international law that has been borrowed by UK tax legislation to determine a person’s liability to UK tax in certain circumstances. For example, the remittance basis of taxation can only be claimed by individuals who can show that they are not domiciled in the UK under general law.
It must also be remembered that domicile under general law (applicable for UK income tax and capital gains tax purposes) is entirely separate to the statutory definition of ‘deemed domiciled’, which is used for inheritance tax purposes only. Domicile is, in summary, a mixture of fact, history, background and intent. It is not determined by any one factor such as where a person is resident, their citizenship, where their assets or family are located or the type of passport they hold. These factors may be relevant but are not in themselves decisive. So far as a person’s intention is concerned, HM Revenue & Customs will look at whether such intention is evidenced by the client’s personal, economic and social ties. Under UK law, every individual must have a domicile in one specific jurisdiction, but it is of course possible for a client to be domiciled in a different jurisdiction under the law of another country; hence the interplay of double taxation treaties.
In order to take a meaningful view on a client’s domicile position, advisers need to analyse the history of the client’s life from birth, including antecedence, the pattern of their life and current intentions.
There are several different types of domicile. All of us are born with a domicile of origin. This is usually the client’s father’s domicile on the date of birth (unless born illegitimate or after the father’s death). However, if a client’s father changes his domicile during the client’s minority the client may have acquired a different domicile of dependence during their childhood because the domicile changes with that of his father. If the parents of a minor child separate, the child will take the domicile of the mother as a domicile of dependence if the child has their home with their mother and not the father.
A domicile of origin is retained unless and until one acquires a domicile of choice in a different country. This requires the person to sever links with the country of the domicile of origin and form a definite and permanent intention to regard the new country of residence as a permanent home. This must be evident by appropriate personal, economic and social ties. It is not necessarily sufficient, for example, for a client to sell their property in the UK, move to Spain and claim to have acquired a domicile of choice in Spain. A domicile of dependence converts to a domicile of choice automatically on the client reaching majority. Generally speaking, it is difficult for a client to lose a domicile of origin, which means that clients can live in the UK for many years without becoming UK-domiciled. Conversely, it is not easy for a UK client to show that they have acquired a domicile of choice elsewhere.
If the client abandons their domicile of choice by leaving that country with the intention of not returning, but does not acquire another domicile of choice (for example they are undecided where they want to settle), then their domicile of origin automatically revives. The type of domicile a client has matters because, for example, it is more difficult to displace a domicile of choice than a domicile of origin.
There are also certain peculiarities under the law of domicile. Before 1 January 1974, a woman automatically took her husband’s domicile on marriage. A woman who married before that date is treated as retaining her husband’s domicile as a domicile of choice from that date. There are even exemptions to this rule for tax purposes in the context of certain double taxation treaties (the US being one example).
- Fred is born in California to a father with a UK domicile. Fred’s mother is French and domiciled in France. She has lived in California but only on a temporary basis to accompany Fred’s father. Fred’s father is working in California when he is born and continues to do so throughout Fred’s childhood. The father is residing in California for the purpose of pursuing his career and does not form any permanent or definite intention to regard California as his permanent home. Fred has a UK domicile of origin even though he may never have set foot in the UK.
- If, during Fred’s childhood, Fred’s father does form a definite intention to remain in California (and in practice the location of his personal, economic and social ties supports this), Fred’s father acquires a Californian domicile of choice which displaces his UK domicile of origin. Fred is under 16 at this time so his UK domicile of origin converts to a Californian domicile of dependence. When Fred reaches 16, his Californian domicile of dependence converts to a Californian domicile of choice automatically. If he leaves California to go travelling but has no firm intention to settle in any one country on a permanent basis Fred’s UK domicile of origin revives.
- Fred’s parents separate during his minority and he has a home with his mother and not his father. Fred’s domicile of origin converts to a French domicile of dependence.
- If Fred’s parents were not married when he was born he would have taken a French domicile of origin, which he will retain unless and until he acquires a domicile of choice elsewhere.
Domicile remains important for many aspects of UK tax law. It determines whether a client is eligible to claim the remittance basis of taxation (that is, only pay UK income tax and/or capital gains tax on income or gains that they bring to or enjoy in the UK). It also determines the tax treatment of a UK resident settlor or beneficiary of a trust as well as potentially affecting the tax status of the trust itself.
Outside the tax arena it is a prerequisite to making a claim under the Inheritance (Provision for Family And Dependants) Act 1975. If a person is within the category of people eligible to make a claim for ‘reasonable financial provision’ they can only do so if the deceased died domiciled in the UK. Much of the case law on domicile derives from this point.
There have been various suggestions and consultations on codifying the meaning and effect of domicile but none of them have come to fruition. In this context, and if the theme of certainty is to be followed through, it may be time to place the meaning of domicile back on the political agenda.
Jane Lee is a legal director at Pannone and member of the Law Society’s Capital Taxes Sub-Committee