Domicile & Tax

It was announced earlier this week (Monday, 24 October) that former Chancellor, Rishi Sunak, would become the new leader of the Conservative Party and therefore the UK’s new Prime Minister weeks after losing out on the leadership race to now resigned Prime Minister, Liz Truss.

The former Chancellor has received some negative attention in the past due to his own wealth and the domicile status of both him and his wife, Akshata Murty, with him having previously held a US green card meaning his taxable income was being paid to US authorities. His wife also came under criticism as it was revealed she held non-domicile status in the UK.

This domicile status would mean that she avoids having to pay any tax on any income received from outside the UK. This meant that any dividends she received from a company (based in India) she was a shareholder of wouldn’t be subject to UK income tax. However, all income she received in the UK would be taxed at her individual tax rate.

Holding this non-domicile status would also mean that on death, inheritance tax would not be payable on any worldwide assets and only assets which were held in the UK.

But what exactly is ‘domicile’ and how does it affect an individual’s tax position both during their lifetime, and also potential taxes on their death.

What is domicile?

Domicile refers to the place where a person has their permanent home and residence and will, therefore, determine an individual’s liability to income tax, capital gains tax, and Inheritance Tax.

Your domicile’s usually the country your father considered his permanent home when you were born.

You can elect a domicile of choice if, for example, you have moved abroad and you intend to set up your permanent home there.

Under English and Welsh law, you will be deemed UK domiciled and therefore subject to UK Inheritance Tax on your worldwide assets if you have been a UK resident for 15 years out of a 20-year period.

Inheritance tax and domicile

When a person passes away holding assets both in England and Wales and abroad, any Inheritance Tax due on the estate would be dependent on their domicile at death.

If they are deemed to be domiciled outside of England and Wales, assets held in another country would not be subject to Inheritance Tax in the UK. However, taxes may still be payable in the country in which those assets are held.

When submitting an Inheritance Tax report to HMRC on death, there is detailed paperwork which must be completed to ensure the correct domicile of origin is established.

Did the individual intend to move abroad and stay there permanently? Where are all official documents kept such as birth certificates and passports? Where is the individual intended to be laid to rest after a funeral? Where is that individual’s Will held? If the individual was married, what was their husband’s domicile status? These are a non-exhaustive list of factors HMRC would take into account on a person’s domicile status on death.

Domicile also affects the potential Inheritance Tax reliefs, particularly between surviving spouses.

Domicile and potential Inheritance Tax reliefs

Each individual, whether classed as domiciled in the UK or not, has a nil rate band allowance of £325,000 before inheritance tax is payable.

If that person is married, no Inheritance Tax is payable if their estate passes to the surviving spouse on first death due to spouse exemption as long as that spouse is classed as domiciled in the UK.

If a surviving spouse is domiciled outside of the UK, the spouse exemption is limited to £325,000 and event less than that if first death was prior to 2015.

It is important to obtain specialist legal advice to determine domicile status to ensure the correct tax is payable during someone’s lifetime and also on death. It is also crucial that domicile status is taken into consideration when drafting Wills.

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