June 2009
This month article covers the overseas concept of domicile.
Domicile is a concept of private international law (not taxation). The importance of the concept of domicile is that it is used to connect an individual to a place and in turn permit the law governing that place to apply to an individual. Thus an individual, who is declared English domicile, will find that English Law will govern issues such as validity of marriage; jurisdiction in divorce, Wills or intestacy (distribution of property on death where no Will exists).
However, a complication is that not all countries adopt domicile as the relevant concept to determine which personal law will apply to an individual. Many European countries (eg France), with a civil law based system, have tended to adopt the concept of nationality (as the relevant personal law) rather than that of domicile. (The French Civil Code, in applying this concept of domicile to French nationals, is concerned with the place where the individual is principally established.)
Furthermore, even those other countries whose legal system is based on common law (eg Australia, USA, Canada) and who, in principle, have adopted the UK concept of domicile; local legislation has often amended its meaning. It cannot be assumed, that UK implications as to domicile, will be identical under those laws of such foreign common law countries.
Domicile is normally associated with an individual’s permanent home but domicile is not the same as nationality or citizenship. An individual may be a British citizen yet still possess a non UK domicile. Similarly, the acquisition of British citizenship (to hold a British passport) does not automatically result in acquiring UK domicile.
At birth everyone acquires a domicile of origin (this is usually that of the father) unless a child is born illegitimate when the domicile of origin is that of the mother.
A person can change his domicile and acquire a domicile of choice in another country. This requires two criteria to be satisfied:
- The person must reside in a particular country
- The person must intend to remain in that country
It is easy to state the test but very difficult to apply to individual cases. Residence in another country for a long period of time will not create a domicile of choice in that country if the person concerned does not intend to stay there permanently. Another pitfall is that even if a domicile of choice has been established (in country A) but a subsequent move to another country (B) occurs; as soon as that domicile of choice is lost the original domicile of origin will then revert.
Domicile is a key concept as to whether UK inheritance tax (IHT) will apply to both lifetime chargeable transfers and property passing on death. In relation to the latter, HMRC can be particularly zealous in ensuring that all relevant criteria were satisfied before accepting an individual was non UK domiciled.
Property is exempt from IHT if it is situate abroad and the owner is not UK domicile – note that both conditions must be satisfied. If the asset is situated within the UK, it will be subject to IHT even if the taxpayer is domiciled outside the UK.
The corollary is that if the taxpayer is UK domiciled then worldwide assets are caught for UK (IHT); although there could be an offset where the equivalent of IHT has been paid in the country where the overseas assets are situate.
There are two key anti avoidance rules:
- If a person has been resident (for taxation purposes) in the UK for 17 of the last 20 (tax) years, such a person is deemed domiciled in the UK as far as IHT is concerned.
- Secondly, if a person is domiciled in the UK, but dies within three years of obtaining another domicile, such a person is still deemed to be domiciled in the UK for IHT purposes.
The moral here (if you are thinking of retiring abroad permanently) is plan your retirement strategy carefully and in good time!
Next month: Residence
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article.
