Rules around UK Domicile vs Non-Domicile

Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.

The UK government has declared that HMRC will look very closely at British citizens who ostensibly live abroad. The case of Mr Gaines-Cooper unveiled the fact that HMRC is looking carefully at individuals to see where they have centred their lives. In this case, Mr Gaines-Cooper purported to live in Seychelles and visit his family in Britain. However, HMRC had alternative views because they saw that he had a wife and son resident in the UK. He also had a permanent home available to him for use at any time. He even had a bank account and a mobile phone contract. The high court upheld the motion that, in fact, he was living in the UK and visiting Seychelles.

What does domicile mean?

As a British expat, if you extend this thinking in a practical sense, it may be wise to ask yourself what ties you actually have with the UK. Do you have a bank account there? Do you have a property that is available to you any time you visit? The very key is the question, where is the centre of your life?

From what has been revealed to date, HMRC is looking at many factors that they seem to have ignored in the past. It was once common knowledge that if you worked overseas and were away for the majority of your time, not spending more than an average of 91 days per year in the UK, it was pretty safe to assume that you were considered not resident for tax during those years you were away. This is now not necessarily the case.

Ask yourself where you actually live. Do you just visit here from the UK? Do you have a home in your new country rather than the UK? What ties do you actually have in the UK? A business, bank accounts, exclusively available accommodation, mobile phone contracts, club memberships, your own vehicle in the garage or similar ties?

Taxes for Non-UK domiciled residents

• Non-UK assets are not subject to UK inheritance tax.
• There is no UK income and gains tax on non-UK income and gains unless and until those funds are “remitted” to the UK – brought to the UK directly or indirectly.
• Special capital gains tax rules apply to UK real estate.

Non-domicile for IHT purposes

In a similar fashion, HMRC is also carefully inspecting the domicile of individuals to assess whether they should be liable for inheritance tax (IHT). If you are domiciled in the UK, then your estate will be liable to IHT on your worldwide assets after you pass away.

“Domicile is tricky, especially when HMRC generally will not rule with an individual assessment until after you actually die.”

Am I UK-domiciled?

If you were born in Britain and your father was domiciled there, you are almost certainly in the UK. If this is the case, then your estate will be liable to IHT. Many expats intend to live in an alternative country for the remainder of their lives, so they may change to a domicile of choice in the country where they reside.

How can I become non-domiciled in the UK?

In order to achieve a domicile of choice, you would need to establish that all your ties with the UK have been severed and that you intend to settle in an alternative country. This sounds relatively simple, but it actually is not. You will need to sell any investment and primary residence you have in the UK, cease all memberships and spend less than 183 days in the UK a year. The complexities involve not only establishing that you have, in fact, moved from the UK but also that you have genuinely moved somewhere else. Owning a property outside of the UK in your new preferred country of domicile can help your case, too.

There is a little-known rule stating that to change your domicile status, you have to live outside the UK for a full six tax years. However, if you change your residency at any given time, the clock resets to zero, and the six-year rule will apply to your next destination.

UK domiciled or non-domiciled: UK assets are subject to IHT

Many also overlook that any assets in the UK are subject to IHT there whether or not you are domiciled or resident, live there or otherwise. This would particularly apply to a property. Yes, you may own investment property in the United Kingdom and still be non-domiciled there or even not be a UK resident.

Deemed Domicile – For long-term UK residents

The most significant change to the non-domicile rules, with have taken effect from 6 April 2017, is that if you have been a UK resident for 15 of the previous 20 tax years, you will be deemed the UK domiciled for all tax purposes. However, for those who will stay beyond 15 years, non-UK resident trusts established before becoming deemed domiciled offer tax deferral and/or exemption opportunities.

Breaking deemed domicile status requires leaving the UK for at least six complete tax years (for income tax and capital gains tax purposes) if someone intends to return to the UK. If they do not, they must leave for at least three full tax years for inheritance tax purposes. Remaining non-UK residents for six complete tax years will restart the 15-year clock for the deeming of domicile.

Mitigating the risk

Ultimately, it is up to HMRC and the court to determine your domicile status. The process of changing and maintaining the non-domicile position is lengthy and complicated, with the possibility of numerous questions regarding intentions, lifestyle, family and social connections, both from a historical perspective and to establish future intentions for domicile purposes. As mentioned earlier, your domicile can also be challenged upon your death, potentially bringing a foreign estate within the scope of UK inheritance tax.

There are IHT planning techniques, such as establishing a Pension Trust, which British expats, UK residents and UK asset owners can use to their advantage. Contact Soteria Trusts to set up a consultation to discuss your individual circumstances and see how we can help you.

This article has been written by Andrew Wood, Managing Director of Business Class UK – the sole distributor of Soteria Trusts services in the United Kingdom. Connect with him on LinkedIn: https://www.linkedin.com/in/andrewwoodbca