Your domicile of origin is akin to your birth right, automatically assigned at birth. If your parents were married when you were born, you typically assume your father’s domicile. If not, you adopt your mother’s.

This domicile of origin sticks with you, regardless of where you roam. This is irrespective of where you were brought up or where you live now.

You acquire this domicile if your parent (who determined your domicile of origin) acquires a new domicile whilst you are under the age of 16.

Then, there’s domicile of choice. This status is your right to sever ties with your domicile of origin and declare another place as your permanent home. However, it isn’t as easy as simply packing your bags and moving to sunny Spain, for instance.

To establish a domicile of choice, two primary conditions must be met:

For example, if you moved to Spain and bought a property, changed your banking arrangements, registered with local doctors, and expressed the intention to remain there indefinitely, you could argue for Spain as your domicile of choice. However, it’s worth noting that the burden of proof falls on you. Authorities often view claims of changed domicile with scepticism, especially if it seems like a strategic move to avoid taxes.

And if you do wish to elect a new domicile of choice it’s important you ensure this is possible. You can seek a legal opinion on whether it is achievable and obtain an official legal domicile opinion. This can be held on file with your Will so as to avoid any challenges during the probate process.

Don’t be fooled into thinking that just because you have lived somewhere outside of your original domiciled country you can simply elect that to be your new domicile.

Finally, we come to deemed domicile – a concept particularly prevalent in the realm of tax law. Deemed domicile is not where your heart calls home, but where the taxman says you belong.

In certain jurisdictions, like the UK, you can be deemed domiciled for tax purposes if you were resident in the country for at least 15 of the past 20 years, or if you had your domicile of origin in that country and resided there at any point in the past three years.

This concept ensures that long-term residents can’t dodge their fair share of taxes by claiming a foreign domicile of choice. It’s essentially a legal assertion that says, “You’ve been here long enough; it’s time to pay up like a local.”

Changes since the UK Spring Budget

Following the UK Spring Budget 2024, a consultation is underway for a nose-to-tail arrangement regarding inheritance taxes on worldwide assets. The proposed plans under consideration are that once a non-UK domicile has been resident in the UK for more than ten years, they will automatically be liable to UK IHT on their worldwide assets. Conversely, for those who are UK-domiciled but reside offshore, the proposal is that such individuals will no longer be subject to IHT on assets they hold outside of the UK.

Significant changes are afoot within the UK taxation system, and navigating this is likely to be complex, especially when it comes to understanding the rules regarding deemed domicile status.

If you’re a non-domiciled individual who has been residing in the UK for an extended period, you might find yourself classified as deemed domiciled, which significantly impacts your tax obligations.

What does this mean for your worldwide income, capital gains, and inheritance tax (IHT) liabilities? And importantly, is there a way to lose your deemed domicile status if you decide to leave the UK?

Here, I break down the current deemed domicile rules, how they affect your tax obligations, and what changes are on the horizon. With new legislation set to come into effect from April 2025, understanding these nuances is more important than ever, whether you’re a long-term UK resident, a newcomer, or someone considering moving away.

How do the deemed domicile rules work?

As of the date of writing (August 2024), you will generally be deemed UK domicile if you have been resident for tax purposes in the UK for at least 15 of the previous 20 tax years.

If you are deemed domiciled, you are liable to UK tax on all of your worldwide income and gains and subject to inheritance tax on all of your worldwide assets.

Can you lose your deemed domicile status if you leave the UK?

It is possible for an individual who becomes deemed UK domicile to lose this deemed status. You can lose deemed domicile status if you leave the UK and have spent at least 6 tax years as a non-UK resident in the 20 tax years before the relevant tax year.

If you plan to “break” deemed domicile status, close attention must be paid to the provisions of the UK’s statutory residence test to ensure that you will qualify as a non-UK resident throughout the required period. Deemed domicile will not be “broken” if you resume UK residence too soon.

Why is this important for IHT?

Currently, domicile is the primary connecting factor when it comes to determining a person’s liability to IHT. The basic rule is that if a person is either UK domiciled or deemed domiciled, they will be subject to IHT on their worldwide estate (subject to any exemptions and reliefs that may apply). A person who is neither UK domiciled nor deemed domiciled is generally only liable to IHT in respect of property situated in the UK.

If a deemed domicile leaves the UK will they still be liable for IHT?

Loosing deemed domicile for inheritance tax purposes (IHT) works slightly differently. Where an individual has become deemed domiciled for IHT purposes, their deemed domicile can again, in principle, be “broken” by a period of non-UK residence.

Under the current rules, deemed domicile status disappears for IHT purposes once you have been a non-UK resident for more than four consecutive tax years or have permanently left the UK to establish a domicile of choice elsewhere.

Under UK law, the burden of proof regarding a change of domicile falls on the person alleging the change. Under English law, the standard of proof is more onerous than in most civil law matters, and if the question of a change of domicile had to be considered by the court, the necessary elements of residence and intention have to be shown.

But….The rules are changing!

It’s the government’s aspiration that the concept of domicile for tax purposes is removed from legislation, and will be based instead on residence. It is also likely intended that the IHT regime will, too, pivot to one based on residence. The expectation is that anyone who has been a UK resident for at least ten years will be within the scope of IHT on their worldwide assets. Those who do not meet this residency criteria will suffer an IHT charge on relevant transfers of their UK assets only. But it’s very important to note, this is still the subject of a wider consultation and nothing is in legislation yet.

The ten year tail

And alas, more than simply upping sticks will be needed to solve the immediate issue. Anyone who has been resident in the UK for ten years or more and then leaves the UK will remain subject to UK IHT on their worldwide assets for a further ten years.

This is known as the ‘tail’ provision, intended to keep a person within the scope of IHT for ten years after leaving the UK. As noted above, when looking to the current rules, this would be a significant extension of the current domicile-based regime where a person continues to be deemed domiciled for IHT purposes for the first three years of non-residence. As such, they are only subject to IHT on their worldwide estate until the start of their fourth year of non-UK residence.

So the proposed changes open up a whole new way of thinking about IHT planning.

Could this be a new opportunity?

So, the intention is to move to a residence-based system from 6 April 2025. It is possible that the proposed change could mean that those who become non-UK residents for at least 10 years and remain so will only be subject to IHT on their UK assets. So that it no longer matters if significant links to the UK are retained. So long as the provisions of the UK’s statutory residence test confirm non-UK residence, as the key criteria will be a person’s place of residence for tax purposes. The proposed new rules could then potentially benefit UK-domiciled persons leaving the UK or those who are already non-UK residents.

It is notoriously difficult to lose a UK’ domicile of origin’, such that a person originally from the UK may not cease to be UK-domiciled even after several decades of non-UK residence. In addition, the nature of the UK concept of domicile – which has evolved through case law over several centuries – means it can be notoriously difficult to determine where an internationally mobile person is domiciled or to pinpoint when their domicile status changes. The shift from a domicile-based system to a residence-based system will enable such persons to determine with absolute certainty their exposure to IHT, and may make it easier for UK domiciled persons to lose their worldwide IHT exposure.

But the technical notes state, that the consultation will include consideration of further criteria such as other connecting factors, suggesting that the shift to a residence-based system may not be as simple as at first appears. Indeed, if a person’s other connections to the UK – such as whether they have a UK home, where their family lives, where the majority of their assets are etc – were to become relevant to their IHT exposure, this could create just as much uncertainty under the new regime as under the current domicile-based regime.

Trusts

It is also proposed that trusts’ IHT exposure will be reformed. Under current rules, any trust settled by a non-dom and holding only non-UK assets is permanently sheltered from IHT, even if the non-dom settlor subsequently becomes UK-domiciled or deemed domiciled, even if they may continue to benefit from those assets.

It is proposed instead that such trusts will be subject to IHT if the settlor meets the residence criteria when an IHT charge might otherwise apply (such as on the settlor’s death or 10-year anniversaries). Going forward, any trusts settled by family members who are both non-dom and non-UK residents may be particularly important planning vehicles where there are also UK-resident family members wishing to minimise their own IHT exposure.

The technical notes state that the current IHT treatment will continue for non-UK property settled by a non-UK domiciled settlor prior to 6 April 2025. But for new trusts settled on or after 6 April 2025 by non-UK dom settlors, these will be subject to the new residence-based rules. But again this is subject to consultation, and it is proposed that the chargeability of trust assets will depend on whether the settlor meets the residence criteria or is within the ten-year tail provision at the time assets are settled and/or when a charge arises, e.g. the ten-year anniversary or exit charges apply.

The existing inheritance tax regime that applies to foreign assets held by trusts settled by non-UK-domiciled individuals was expected to remain in place for any trusts settled before 6 April 2025. But Labour has said that they may look to include all foreign assets held in a trust within UK inheritance tax whenever they are settled.

What can you do to mitigate IHT as a UK Deemed domicile?

It is extremely difficult to plan with any certainty until we have more clarity on the proposals and what will become legislation. If the 10 year residence rule comes into effect this could arguably make things much simpler as the system will be based on residency rather than domicile.

If you’re looking to leave the UK and would therefore be subject to the ‘tail’ provision of ten years it will be important to consider what options are available to you to protect your wealth within that 10 year period. For deemed domiciles looking to relocate, the ten-year tail period is important, particularly if your beneficiaries could be heading for a big IHT bill within that period.

We wait with bated breath.

These announcements represent a complete reform of the UK taxation of non-doms (and indeed UK domiciliaries who are or have been non-UK residents), so all affected taxpayers should ensure they understand their future tax exposure. As always, there will be winners and losers from the new rules. Deemed domicile status has far-reaching implications, and the upcoming changes only add to the complexity.

By staying informed and proactive, you can navigate these challenges effectively and make decisions that align with your long-term financial goals. Whether you’re considering leaving the UK or want to optimise your tax position, understanding the rules is essential.

Assuming that the non-dom changes are not delayed and are effective from April 2025, there may be little time for clients to weigh up their options between the publication of draft legislation and the end of the tax year. Hopefully, greater clarity on the scope of the new inheritance tax provisions can be outlined soon.

If you’re concerned about how the changing deemed domicile rules could affect your tax situation, Consulting with an advisor can help you understand your current standing and explore strategies to minimise your tax liabilities.

Non-domicile (non-dom) is a British tax status that dates back to colonial times. The domicile rules have been part of the UK tax system since 1914.

But following the UK Spring Budget unprecedented changes are coming to UK tax policy.

The old non-domicile rules meant a person who is registered as non-domiciled with HM Revenue and Customs but is tax resident in the UK does not have to pay UK tax on income and capital gains earned overseas – including on company stocks or cash made from selling a second home – unless they bring their money into the UK or deposit it into a UK bank account.

However, non-doms still have to pay taxes on money earned within the UK. Non-doms had to specifically apply for a tax exemption on foreign income.

If an individual was a UK resident but had a non-dom status, they could choose to be taxed on either the arising or remittance basis. Which worked like this:

• Arising basis – income is taxed in the year in which it arises or is received. It makes no difference whether such income is brought back to the UK or kept overseas (i.e. taxable on worldwide income and gains).
• Remittance basis – Foreign income is only taxed in the UK if it is brought back (i.e. remitted) to the UK or is enjoyed in the UK.

But this is all set to change. What does this major shift mean for UK residents’ global income?

The non-dom status allowed certain UK residents, who could claim their permanent home (domicile) outside the UK, to limit the tax paid on income and gains generated outside the UK. This status has been a fixture of the UK tax system for over a century,

Key Changes Announced:

Residence-Based Taxation: Individuals tax-resident in the UK for more than four years will now be subject to UK tax on their worldwide income and gains, irrespective of where these earnings are generated.

Transitional Arrangements: The government has planned transitional arrangements to smooth this transition, including a rebasing of capital assets’ value to 5 April 2019 for existing non-doms and a temporary 50% exemption on foreign income taxation for the first year under the new regime.

Temporary Repatriation Facility: A two-year facility will enable individuals taxed on the remittance basis before April 2025 to bring foreign income and gains into the UK at a favourable 12% tax rate.

Existing non-domiciled UK tax residents who have been UK tax residents for less than four years will be eligible to opt into the new scheme and will benefit from relief until the end of their fourth year of tax residence.

Under the new system, regardless of where an individual is domiciled, anyone who has been a tax resident in the UK for more than four years will pay UK tax on any newly arising foreign income and gains,

This seismic shift in policy will necessitate a reevaluation of tax and wealth management strategies for those affected. A lot of people who are currently non-doms are going to see 50% of their overseas income subject to UK tax as soon as April 2025.

What’s the situation for inheritance tax for non-domiciled?

In simple terms, the rules stated that the estate of a non-dom would only be chargeable to UK inheritance tax in respect of UK situs assets.

But the government is also consulting on introducing changes to inheritance tax (IHT) so that it is based on the new residence-based regime.

To provide certainty for affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change – these assets will not fall within the scope of the UK IHT regime. If you are a non-dom living in the UK with assets abroad, there is a small window of time to make use of such structures. Excluded property trusts are typically used here broadly, it is an arrangement whereby you (the settlor) part with the ownership of specific assets (which become the trust fund) by transferring them to a third party (the trustee) who is bound to hold them for the benefit of others (the beneficiaries, which can include the settlor).

Currently, liability to IHT depends on domicile status and the location of the assets. Under the current regime, no IHT is payable on non-UK assets of non-domiciled taxpayers until they have been UK residents for 15 out of the past 20 tax years, but this may change after the consultation period.

The abolition of the non-dom status represents a significant change in the UK’s approach to the taxation of international individuals.

Non Dom IHT

Non-doms remain entitled to the nil rate band (set at £325,000 per individual). However, they are not entitled to the full spousal exemption. UK residents and domiciled individuals can leave/transfer assets to spouses without incurring any IHT charges. This is limited to £325,000 for non-doms.

IHT Planning for a Non-Dom Spouse

If you are UK domiciled and your spouse is non-UK domiciled,, you must be mindful of the rules relating to UK IHT. If you plan to transfer your estate to your non-domiciled spouse, you could be heading for a hefty tax bill.

The United Kingdom’s perspective on domicile and inheritance tax (IHT) is complex. For UK domiciles, worldwide assets are subject to IHT. Conversely, for your non-domiciled partner, this rule applies solely to their UK assets.

UK-domiciled spouses or civil partners transferring assets between themselves, and non-UK domiciled individuals transferring assets to a spouse or civil partner (regardless of domicile), can transfer any value of assets free of Inheritance Tax (IHT).

Why does this hold significance?

The United Kingdom permits transfers between UK-domiciled spouses devoid of IHT, however, this benevolence is not bestowed upon their non-domiciled counterparts. There exists a limit, which is alarmingly effortless to exceed.

Where a spouse is UK-domiciled and the recipient spouse or civil partner is non-UK domiciled, the spouse exemption is capped at the amount of the nil rate band (currently £325,000) Any gifts in excess of this amount may be subject to IHT.

So it’s imperative to understand the rules of passing on wealth if your domiciles are different.

Choosing to be recognised as UK-domiciled for IHT considerations could turn the tables in favour of your non-dom partner. Indeed, it subjects their global assets to IHT but simultaneously, provides access to unrestricted spousal transfers.

The number of ‘mixed’ domiciled marriages has significantly increased, and yet (albeit understandably), many married couples are unaware of the IHT ‘trap’ awaiting them. As a consequence, the opportunity to undertake appropriate planning is overlooked.

A crucial factor when it comes to tax

Determining your domicile for tax purposes

It’s important you understand your domicile status.

Domicile is a crucial factor in the UK taxation system because it impacts how an individual is taxed, particularly for income earned abroad, inheritances, and capital gains.

Individuals who are domiciled in the UK, even those that live abroad and have done so for many years, are still subject to IHT on their worldwide assets. So if you believe you may have an IHT liability, don’t think your beneficiaries will get away with not paying the tax because you live abroad. And certainly, where the intent of domicile of choice can’t be proved, you should seek advice on tax-efficient wealth transfer strategies.

Foreign tax residency or dual tax residency

You may live abroad and pay income tax in another country. Or you may even be a dual tax resident of two countries. If you live in the UK and another country and both countries tax your income, you’re a dual resident.

You can claim full or partial relief on UK tax if the 2 countries have a double taxation agreement that allows you to do so. You need to look at the particular terms of your double taxation agreement to find out if you can claim relief from UK tax.

But despite this the domicile rules, separate to residency rules still apply and if you are UK-domiciled you will still be subject to IHT on your worldwide estate

This seemingly obscure term can wield considerable influence over your tax liabilities.

Get in touch to find out more.

There is no formal process for agreeing your domicile status with HMRC, But you can seek clarity on what your domicile status is. And in some cases seek an official legal domicile of opinion for your records and for the avoidance of doubt.

Domicile is a complex area of law, particularly for inheritance tax purposes. If you’re looking to claim a change of domicile, or if there’s a significant amount of UK inheritance tax at stake, you should take expert advice that is specific to your circumstances.

Whether or not you have UK domicile status, there are tax planning arrangements available to reduce your liabilities to inheritance and other taxes and steps you can take to minimise unnecessary taxes for your heirs.