Domicile of Choice and losing your UK Domicile of Origin

Your ‘domicile of origin’ is the domicile with which you were born. This is entirely dependent on the domicile of your parents at the time of your birth as such it is becoming increasingly common to be domiciled in a country where you were not born and conceivably have never even visited. . Knowing where you are domiciled is vital for taxation purposes and it might be possible to displace your domicile of origin for a domicile of your own choice. However, this process is complicated as a UK domicile of origin is notoriously hard to shed.

When evaluating the location and value of your global assets – especially if you are a British-born national who has resided overseas for a number of years and do not intend to return to reside in the UK – it is essential to establish in which country you are domiciled under British law.

Many British expatriates, even those that have lived in another country for decades, still find themselves – often unknowingly – UK-domiciled. As a result their global assets will be liable to UK Inheritance Tax (IHT) at a rate of 40%

It is also important to note that the UK have deeming provisions that affect:

1. those born in the UK with a UK domicile of origin,
2. those who have ever held a British domicile, and  
3. non-UK domiciled individuals who have been resident in the UK for 15 out of the last 20 tax years are now deemed to be UK-domiciled.

This not only means that their worldwide estate may be exposed to UK IHT, but that they will be liable to UK Income and Capital Gains Tax on their global income and gains!

Advisers will need to review each client’s individual circumstances, making 100% sure that they and their clients are aware of the consequences of domicile. If there is any uncertainty, if a client’s situation is complex or if a client expresses concern about estate planning, advisors can then pursue further courses of action – either by achieving certainty that a client has acquired a ‘domicile of choice’, or by taking steps to legally reduce exposure to UK IHT.

What is a UK domicile of origin?

Your ‘domicile’  is a general legal concept that determines where your permanent home is located regardless of your current country of habitual or fiscal residency. It is separate from nationality, citizenship and residence. Every person is born with a domicile and can only have a single domicile at any given time. It is impossible to lose your domicile of origin however it can be displaced by replacing it with a domicile of choice.

A ‘domicile of choice’ can only be acquired by adequately severing ties with the UK, being a long-term permanent resident of an overseas nation and committing to remain resident in that same nation  for the indefinite future.

A case that highlights the complexity of changing your domicile status and the ever present need to evaluate is constantly is that of Henwood v Barlow Clowes International Ltd. Mr. Henwood was born with in England with an English domicile of origin. He successfully acquired an IOM domicile of choice.

However, in 1992 Mr. Henwood with his wife moved to Mauritius. By leaving the IOM, he ceased to live there permanently and as such gave up his IOM domicile of choice. He then lived in Mauritius from 1992-2005, had a will under Mauritius law and a burial plot there as well. The question was whether he had obtained a Mauritius domicile of choice during this period of time.

Mr. Henwood had not maintained any strong ties with England, had lived in Mauritius for 13 years and certainly had no intention to return to England. However, during these same 13 years he and his wife had also spent a lot of time in France where they had a property and many of their personal possessions. Their lives were such that is was not possible to determine by their actions whether they had definitively chosen to permanently reside in France or Mauritius. As such, Mr. Henwood had failed to acquire a domicile of choice in Mauritius and during those 13 years his English domicile of origin had been reactivated.    

UK-domiciled and deemed UK-domiciled persons will be liable to UK IHT on death at a rate of 40% on their global assets that are above the nil rate band, which has remained at just £325,000 for many years. Even a main family residence will eventually be subject to UK IHT. Non-UK residents that are still UK domiciled could also find themselves liable to taxation in their country of residence.

How to acquire a Domicile of Choice?

A person can acquire a domicile of choice to replace their domicile of origin. To do this they must both:

If a person has acquired a domicile of choice, they will usually revert automatically to their domicile of origin if they leave the place in question and have the intention of abandoning their permanent home or indefinite residence there. They will then  reactivate their domicile of origin until they acquire another domicile of choice.

To show a change of domicile it is essential to establish an intention of remaining in the place permanently or for an unlimited time. Every event in a person’s life may be relevant. You must therefore take into account of all the evidence that can reasonably be gathered.

Declarations of intention to remain permanently or to retire in a place are important, but you must bear in mind the context in which they are made and whether they are consistent with your actions. Even stating in your will that you wish to be buried in the UK or electing for UK succession law to apply over local ‘forced heirship’ rules could work against you.

When to seek advice regarding your domicile?

Domicile is complicated, particularly when it comes to addressing taxation, succession or asset protection. If there is scope to acquire a non-UK domicile of choice, and especially if there is a significant amount of potential UK IHT at stake, you should always seek professional advice.

The most effective route is to obtain a domicile opinion to verify that a non-UK domicile of choice has been established. Non-UK Assets settled into an overseas trust should not then be exposed to UK IHT on death, while the balance of assets can be held, accumulated and/or distributed in part or total to surviving beneficiaries.