The jurisdiction with which an individual and their family are connected is the most important factor when working out a tax strategy but deciding on the country of domicile can be fraught with difficulties
The first step in developing a tax and estate planning solution for an individual and their family is to determine the jurisdiction with which they are connected.
The primary connecting factor to consider for individuals originating from or moving to the UK is domicile.
Domicile is a conflict of laws concept borrowed by tax systems that determines the applicable system of personal law when an individual has connections with more than one jurisdiction. Domicile is crucial for UK tax purposes but also determines the appropriate system of personal law governing such things as the validity of marriage and the determination of succession rights for an individual and his family.
While shifting domicile may prove attractive for tax reasons, it can have other unexpected and unwelcome legal effects, such as the application of forced heirship or inheritance rules, which apply in continental European countries and their former colonies.
The four principles governing domicile are:
• Domicile must relate to a territory subject to one law ' a legal jurisdiction.
• No one shall at any time be without a domicile.
• No one can at any time have more than one domicile.
• A change of domicile may never be presumed.
An individual is domiciled in a legal jurisdiction, which need not necessarily be a country. For example, an individual cannot be domiciled in the US or Australia because these countries have federal legal systems ' they would be domiciled in specific states such as California or New South Wales.
Nor can people be domiciled in the UK ' you are domiciled in England and Wales, Scotland or Northern Ireland. However, for UK tax purposes, people are treated as domiciled in the UK.
The three types of domicile under the general law are:
• Domicile of origin. The domicile an individual acquires at birth, which is generally the domicile of their father at the time.
• Domicile of dependency. The domicile a child acquires if their father's domicile changes during their minority. It can also apply to women who were married before 1 January 1974 who would have taken a domicile of dependency from their husband on marriage.
• Domicile of choice. The domicile an individual acquires if they leave their current territory of domicile and settle in another territory with the intention of living there permanently or indefinitely (only applicable to individuals who have attained their majority).
Deemed or fictional domicile is a tax concept designed to maintain or create a connection with a territory for tax purposes, where the individual would not be considered domiciled under the general law. In the UK, deemed domicile is only appropriate for inheritance tax purposes, although it has been suggested it be extended to income tax and capital gains tax. This may be the result of the current Government's review.
Deemed domicile applies for three years to individuals leaving the UK from the time they acquire a domicile of choice outside the UK under the general law (the inheritance tax quarantine period) and after 17 years of tax residence for individuals moving to the UK where they do not acquire a domicile of choice in the UK under the general law.
There are traps for the unwary in determining the relevant dates under these rules: immigrants can become deemed domiciled after fifteen calendar years in the UK and while emigrants, since the 17-year rule also applies to them, only cease to be deemed domiciled after three complete tax years of non-residence.
When an individual acquires a domicile of choice it is as if they are connected to their domicile of origin or dependency by a piece of elastic, known as the doctrine of continuance. If they change their domicile of choice their domicile of origin revives, however briefly.
This could have the effect of triggering a further three-year deemed domicile quarantine period for UK inheritance tax purposes, which can be a trap for the unwary when undertaking pre-immigration planning using trusts.
An individual's domicile of origin or dependency depends upon their father's domicile at their time of birth and any changes to it during their minority. Determining the father's domicile history can be like solving a detective mystery if his domicile has changed, especially if he is deceased.
However, the children of immigrants into the UK can have a domicile of origin or dependency outside of the UK and, if they intend to move or retire outside of the UK in the future, may never acquire a domicile of choice in the UK, even though they have lived there all their lives.
While an individual may be tax resident and/or a citizen of more than one country, they can only be domiciled in one territory at any one time and must have a domicile. As a result, a domicile of origin or dependency cannot be abandoned but must be displaced by establishing a domicile of choice.
Criteria such as reserving grave plots and taking out club memberships should be viewed as largely apocryphal. What is important is the fact of establishing a new permanent home and the intention of staying there indefinitely.
One sometimes hears people saying they have not chosen a domicile in another country. But domicile is not a question of choice or election as such, it is a question of fact and intention. An individual can be domiciled in a jurisdiction without realising it.
It has been said that under the UK's current rules, domicile is relatively easy to determine but the result is not always fair. Proposed, but ultimately jettisoned, reforms of the rules have in the past produced arguably fairer results but at the cost of a much more difficult and indefinite analysis.
Domicile rules appear to be one of those things that cannot be both fair and definite. That said, although domicile can be determined with reasonable certainty under the current rules, many individuals are uncertain and often mistaken about their domicile.
NB: The guidance in this article does not constitute professional advice and is intended only as an informal introduction. The views expressed are entirely the author's own and should not be relied or acted upon in any way. Professional advice should always be sought before undertaking tax or estate planning.
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