Most people probably have only a vague understanding of the meaning of the word "domicile" and even fewer realise that it is a distinct legal concept, and one which may affect a number of people considerably in determining the amount of tax they pay.
So, what is domicile? Domicile is essentially a legal concept which is also recognised in those countries who have inherited their legal system from Britain, and that includes the USA in this case. It is something everyone has, that one is born with, and is hard to change. Domicile is normally determined at birth, and for UK purposes in most cases it is inherited from one's father. It might not be the country in which one was born, but the country which one's father considered his permanent home. In the case of a person who was illegitimate or whose parent's divorced during his or her minority, there may be different factors to be considered.
Partly for historical reasons and partly to recognise continuing minor variations in the law to be applied, no one is actually domiciled in the United Kingdom; rather a person may be domiciled in England or Scotland, for example. The concept is enshrined in longstanding case law and does not always sit well with the equal opportunities climate.
It is possible to change someone's domicile with a good deal of difficulty if that individual severs all ties with the country of domicile of birth, establishes a home in a new country, perhaps buys a grave plot there and spends many years in the proposed country of domicile of choice. Unfortunately, when people become older and their health deteriorates, they may come back to their domicile of origin (the one they were born with) for treatment and ruin everything. Dedication is needed.
At this point you are thinking, "Could this affect me?" Well, for those who have domiciles abroad but who are resident in the UK, they have the opportunity to pay much less tax in the UK than the rest of us, but they may not realise it. "Unfair!" you may cry, but nevertheless it is true.
Broadly, persons resident but not domiciled in any of the countries forming the United Kingdom are not liable to tax on income and gains made abroad unless the relevant funds are brought into the UK. This may include income and gains on money originating in the UK, but transferred abroad. Upon their deaths their overseas estates escape UK Inheritance Tax, though anyone resident in the UK for seventeen out of the last twenty years will be deemed to be domiciled within the UK for Inheritance Tax purposes only and thus in the event of death the worldwide estate would become taxable. Even here there is scope for planning, though.
Planning action is required now because a consultation paper was issued by the Treasury a couple of years back with a view to introducing a "fairer" system. "Fairer" in Government-speak has over the past few years meant some would have their tax increased, rather than there being any reductions. That is not being political; that has been the reality. We cannot be certain that the Government will change the law, but there is a climate for change which invites action soon. However, this is not a "loophole". The Treasury's political incumbents have been well aware of the effect of the existing rules since there have been periodic reviews going back at least as far as 1949.
There is a need to plan for the future. We all know business owners and others living in the UK whose families originate from the Commonwealth, mainland Europe and North America and perhaps from elsewhere. They may have been born within UK shores, but their fathers may not have been. The law rubs both ways. Given that those of us who are domiciled within the UK might have a hard job convincing the Inland Revenue of our overseas domicile even if we have lived in Marbella for 20 years, so someone whose family is from Hong Kong may still retain domicile there even if that person has been in business in England for many years.
Those affected probably have a year or so's grace to put their affairs of in order, and hope that there will be no effectively retrospective legislation. Indeed it may be possible to save tax with immediate effect. There must be potentially many millions of pounds of tax to be saved and we are not talking about some dodgy tax scheme or aggressive or unpleasant tax avoidance. A few simple steps need to be taken to safeguard the finances of those affected. However, those steps must take into account the effect of any taxation by other countries.
The above is only summary of the current situation, which is actually quite complex, and it is believed to be correct at the time of writing. If you believe it affects you or may do in the future then you should seek professional advice.
© Jon Stow 2005, 2007
