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 long-standing 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 hitherto had the opportunity to pay much less tax in the UK than the rest of us, but they may not have realised it. "Unfair!" you may cry, but nevertheless it is true. Anyone in this category should speak to an adviser about back tax years and whether a repayment of tax might be in the offing.
However, the law changed in April 2008 and anyone who thinks he or she might be resident in the United Kingdom but not domiciled in a UK country may well be affected and should seek urgent professional advice because the UK tax regime will become much harsher.
In the simplest terms, prior to April 2008 a UK resident non-domiciled individual was not taxed in the UK on income and gains arising abroad but not remitted to the UK.
Unless such individuals are prepared to declare and be taxed in the UK on their worldwide income the new rules from 6th April 2008 impose an annual charge of £30,000 on non-UK domiciled or not ordinarily resident individuals who claim the remittance basis of taxation, if they have been resident for longer than seven out of the past 10 years (unless their unremitted foreign income and gains for the tax year in question are less than £2,000).They remove income tax personal allowances and the capital gains tax annual exempt amount from those who claim the remittance basis (unless their unremitted foreign income and gains are less than £2,000). As I said, this is a brief summary. There is a lot more to it than that.
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.
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. To reiterate, if you believe this issue affects you or may do in the future then you should seek professional advice.
© Jon Stow 2005, 2007, 2008