British expats - are you aware of UK domicile rules?
Written by Jamie Bubb-Sacklyn on April 18, 2019.
Residency and domicile status are essential elements to take into account during the financial planning process, particularly with regard to inheritance tax (you can read my post on that here), but they can be tricky to get your head around.
This article is aimed at you if you are a UK expat and should help you understand your status so that you can plan your financial affairs accordingly. While I have done my very best to provide accurate information, please ensure that you seek professional advice if you are unsure about domicile.
There are essentially five different types of domicile which may or may not be relevant to you.
1. Domicile of origin
Domicile of origin is the homeland of an individual’s parents and is acquired at birth. This can, and often does, differ from the country of birth. For example, John and Sue (who are married, UK resident and domiciled) move to Kuala Lumpur on a two year contract and have a baby, Jack. Although Jack is born in Malaysia, he is UK domiciled and has a UK domicile of origin without having ever been to the UK. Sexist though it may seem, domicile of origin is usually that of the father, unless the parents are unmarried or the father is deceased, in which case a child will acquire the domicile of the mother.
It is pretty difficult to shake your domicile of origin although it is possible by acquiring domicile of choice or domicile of dependency – more on these below.
2. Domicile of choice
If you have settled in Malaysia (or somewhere else in the world) and intend to spend the rest of your life here, you can attempt to change your domicile and acquire a domicile of choice. Obviously this is a decision which requires very careful consideration.
The problem with adopting a domicile of choice is that there are no fixed legal requirements on how to go about this and it remains at the discretion of HMRC, for those with a UK domicile. You have to put the case and provide evidence that you intend to live permanently in Malaysia (or any other country in which you choose to be domiciled) and having spent decades living there is not proof enough on its own.
HM Revenue and Customers (HMRC) will look closely at your ties with your domicile of origin and in particular any assets that you hold there. If you own a home in the UK for example, it is likely that they would reject your claim of domicile of choice.
For example, John and Sue decide to remain in Malaysia and acquire permanent residency status. They have few ties with the UK now but, as they cannot gain a sufficient ruling from HMRC, and understand that many expatriates eventually return to the UK (for family or health reasons), they continue to plan as if they are UK domiciled for the purposes of passing on an inheritance to Jack.
If you are living in Asia (or abroad) long term but remain UK domiciled, it is essential that you take professional advice on estate planning to try and minimise your inheritance tax burden.
3. Domicile of dependency
This applies only to minors. Until a child is 16, their domicile follows the person upon whom they are legally dependent.
For example, if John (or Sue if relevant - see point 1 above), took on Malaysian domicile while Jack was dependent, then Jack’s domicile would change and his domicile of dependency would replace his domicile of origin. Jack is now Malaysian domiciled.
4. Deemed domicile
This applies to non-UK domiciled individuals who are resident in the UK so if your domicile of origin is the UK, this is not relevant to you. The UK introduced new deemed domicile rules in April 2017. If an individual has been resident in the UK for 15 of the previous 20 tax years, then they are deemed UK-domiciled for inheritance tax purposes.
If you are not British and plan to study, live or work in the UK, it is useful to be aware of this status. You can find out more on the UK government website here.
5. Elected domicile
This applies to the non-UK domiciled spouses or civil partners of UK domiciled individuals. As of 6th April 2013 anyone not domiciled in the UK, but married to someone who is, can opt to be treated as UK domiciled for IHT purposes. This is important and here’s why.
For example, Simon is a British expat working in Jakarta and married to Rowena, who is Indonesian. Eventually, they moved to the UK together. For the purposes of UK inheritance tax, upon Simon’s death, the spousal exemption is limited to £325,000 (because assets pass from a UK domicile to a non-domicile). However, if Rowena opts to be UK domiciled, she will benefit from full spousal exemption which means that unlimited assets can be transferred from Simon with no IHT payable until Rowena dies. Upon Rowena’s death, her worldwide assets are subject to IHT.
As you can see, domicile is a complicated issue and one which you need to be certain you understand so that you can take the relevant issues into account for financial planning purposes. Never assume anything and, when it comes to domicile of choice, it is best to plan on a worst-case scenario rather than risk an unfavourable decision by HMRC after your death.
If you’d like help with estate planning or indeed any other elements of financial planning, do feel free to get in touch. I am proud to have just been granted Chartered Financial Planner status by the CII and adhere to the most stringent industry standards always putting the interests of my clients first. Why not drop me a line at firstname.lastname@example.org and see how I can help you get your financial affairs in order?