In March this year, then-chancellor Jeremy Hunt announced significant changes to the taxation of non-UK 'domiciled' individuals, to take effect from 6 April 2025. Implementation of the plans would result in the notion of 'domicile' becoming irrelevant for taxation purposes. There is however danger in assuming this means we can cease to examine the concept in succession matters, as considered in this article. For individuals with connections to more than one jurisdiction (at least one of which is within the UK), an analysis of 'domicile' remains fundamental, and should be carefully considered in light of the proposed changes to the tax rules.

Domicile – what is it, and why does it matter so much?

Domicile as a concept is weird. We private client lawyers get used to bandying the term around. That's because it's the key foundational block on which we must build a picture of the backdrop to each client's estate planning. Currently, within the UK, the concept continues to be relevant in two main areas:-

1. Succession matters

Broadly, domicile will determine the substantive rules which dictate how an individual's moveable (liquid) estate is handled, and distributed; and

2. Taxation

Both capital and income taxation are here relevant.

Currently, for inheritance tax ('IHT') purposes, 'domicile' determines whether or not an individual's non-UK assets will be subject to UK IHT. An individual 'domiciled' within a jurisdiction in the UK faces a charge to UK IHT on their worldwide estate upon death. Non-domiciled individuals ('non-doms') only face IHT on their UK-based estate.

For capital gains tax ('CGT') and income tax purposes, non-doms who are resident in the UK may currently claim the 'remittance basis' for these tax purposes. This means they will be charged UK CGT and income tax only on (i) UK-source income and gains, and (ii) foreign income and gains which they 'enjoy' in the UK.

The remaining foreign income and gains (kept 'outside' of the UK) are not subject to UK tax.

Meaning of domicile

The definition of domicile varies depending on whether you are talking about succession matters, or taxation. In the taxation arena, the legal ('common law') definition has been widened. This means that an individual can be 'deemed' domiciled' within the UK, even if a strict common law interpretation sees them domiciled elsewhere.

1. The legal (common law) definition

As a matter of law (in all jurisdictions within the UK), a person takes the domicile of origin of one of their parents at birth, automatically. They will only acquire a new domicile if they move permanently to another jurisdiction, with the intention to remain there indefinitely.

If either they cease residing in that 'new' jurisdiction, or their intention to remain there changes, the domicile of origin revives unless replaced by a new domicile of choice.

All jurisdictions in the UK provide that succession matters will be governed by the law of a person's domicile.

By way of example, Henry is born in Surrey to English-domiciled parents. He is schooled abroad and also moves around as an adult, but always intends to return to the town of his birth. He dies in his early 40s whilst living out in Australia. As a matter of 'English' law, Henry is domiciled in England and Wales. English law says all of his moveable assets (including any accounts and investments in Australia) will be governed by English law. As a side note of course, Australian law will also be relevant here. Whilst Australia succession law actually applies similar concepts of domicile and situs (to mean Australian based 'moveables' would be governed by the law of the deceased's domicile), the same is not true of most other (non-Commonwealth) foreign countries.

2. The wider tax concept

In the taxation arena, the concept of domicile starts from the same legal principles noted above. If you are domiciled in a jurisdiction in the UK as a matter of law, your worldwide estate is subject to UK IHT.

HMRC however throws some additional nets over those who may not be domiciled as a matter of law within the UK, but who have a connection to UK by either by long term residence, or background.

The most common example of this "deemed domicile" is seen in the long-term resident non-dom.

For non-doms resident in the jurisdiction for 15 out of 20 consecutive tax years, HMRC 'deems' them domiciled in the UK. Hence, a New Jersey-domiciled party who has resided in Scotland for 16 years, returns to the US and dies 3 years later, will be 'deemed domiciled' in the UK. Their worldwide estate will again be subject to UK IHT. For foreign income and gains, they can no longer access the 'remittance basis' after this time. All such income and gains will be subject to UK CGT and income tax, whether or not they are 'brought to' or enjoyed in the UK.

Looming changes

With effect from April 2025, the government's plan is (very broadly) to remove the concept of domicile from the income and capital gains tax arena. Liability to all UK income tax and CGT will simply be based on residence. We believe that this residence-based approach is also going to extend to UK IHT. This will mean that, once a person has been resident in the UK for 10 tax years, their worldwide estate will be subject to UK IHT. If a long-term resident leaves the UK, it will take 10 tax years before they are free from IHT's grip on their non-UK assets.

Much easier to understand, in principle, right? No more considering the grey concepts of intention, and digging back through an individual's history at birth to determine their possible tax position on death. We simply look at the factual matter of residence. That's it.

Brilliant, I hear you cry. I'm nearly at the end of this article in which domicile had been explained so laboriously, yet somewhat pointlessly.

The issue

Except, it is extremely unlikely the tax and succession rules will be aligned.

Domicile will therefore continue to be relevant to us lawyers looking at the affairs of an individual with any cross-border connections. And that may very well affect the individual's UK IHT position. It may also actually lead to greater discord between the tax and legal rules governing international estates, than ever before.

Consider the predicament of the following English divorcee. He remarries and flees to France with his new wife to set up a new life and permanently get away from the bitterness of his children (who disapprove of his new partner). He cuts all connections with the UK and sells his property there.

Upon his death 6 years following creation of his new permanent home, he still hasn't shaken the grip of UK IHT. This will be charged on his French assets. The law of England & Wales will however dictate that he has acquired a common law domicile (for succession purposes) in France, meaning French domestic rules will govern succession to his assets.

These French rules will cut across the terms of his English will (prepared shortly after his marriage and leaving everything to his new wife, and not including a 'choice of law' clause given he owned no foreign assets at the time.). The French rules provide for a forced share of his assets to pass to his estranged children. The value of this share is such that the nil rate band of the deceased is exhausted, and UK IHT is actually payable. The spouse exemption will not apply to the full value of the deceased's estate, as was his understanding at the point of preparing his will.

Concluding remarks

The point is clear, even if the rules are understandably confusing. It is of utmost importance that individuals with cross border connections take advice on their planning. Existing arrangements should be reviewed in light of the changing landscape.

Contributor

Nadine Walton

Senior Associate