Managing trusts and tax

Publish date

27 April 2023

Who is considered non-domicile and how does it impact on inheritance tax?

Non-domiciles (or non-doms as they are often referred to) have hit the headlines recently following the prime minister’s wife’s non-dom status being publicised.  For inheritance tax, having a non-dom status can be very beneficial but it is a complicated area.

What is a non-dom?

A person is considered a non-dom when they have a domicile status outside of the UK.  Domicile is a complicated concept and is based on both actions and the intention of an individual.  A domicile is not automatically obtained by acquiring a new nationality or moving abroad to live in another country.  There are many more factors behind domicile.

Everyone is born with a domicile of origin, usually acquired from parents.  The domicile status of an individual can change throughout their lifetime and at times, the domicile of origin may be revived.  The most likely change of domicile is when an individual obtains a new domicile of choice by permanently moving to a new country and with sufficient intention to remain there on a permanent basis.

Domicile is very case specific and advice should be sought in both lifetime and by executors on the death of a non-dom.

What is deemed domicile?

Deemed domicile is another concept you should be aware of for inheritance tax purposes.  Even if you have a domicile for succession purposes for a country outside of the UK, you can still for inheritance tax purposes, be treated as UK domiciled.  The rules for deemed domicile changed in 2017 with the potential of being caught by the rules now even larger.  To be deemed domicile you now need to be one of the following:

(a)    Domiciled in the UK at any point within the three years leading up to death

(b)    Resident in the UK for 15 of the last 20 years.

What is the difference between residence, nationality and domicile?

The three terms, residence, nationality and domicile, tend to be used interchangeably but, certainly from a legal perspective, have significantly different meanings.  Residence is at its most basic form the country in which you are resident and is generally speaking quite clear to determine.

Nationality is the status of belonging to a particular nation.  You are born with a certain nationality and you can acquire and apply for different nationalities throughout your lifetime.  Again, this is generally speaking quite easy to determine.

However domicile has a very different meaning to both residence and nationality; the domicile of an individual is the permanent home of someone.  It is not generally as clear cut as residence and nationality and many different factors are taken into account to determine the domicile of an individual such as length of time in a country, frequency of visits to other countries, family links, economical links, citizenship and even cultural links.  It is quite possible to be resident in one country, a national of another and domiciled in another.  One important distinction is that you can only have one domicile at a time whereas you can, and will often find individuals, who are resident in two different countries and/or have dual-nationality.

Whilst in England, for tax purposes, a huge amount of weight is placed on the domicile of an individual this is not mirrored in all jurisdictions.  Some countries rely on the residence of an individual for many succession and tax regulations. Other countries rely on the nationality of an individual to determine the laws applicable to succession – such as Italy and the Philippines.

What is the impact of domicile for inheritance tax?

Non-dom status can have a huge impact for Inheritance Tax (IHT).  A person who is UK domiciled for IHT will be subject to IHT on their worldwide estate.  However, a non-dom will only suffer IHT on their assets in the UK.

UK domiciled individuals with assets abroad will need to look to other reliefs such as under a double taxation treaty or unilateral relief to limit the impact of potentially being taxed in two jurisdictions on the same assets.

Our expert Probate team regularly advises on and assists with estates with Domicile issues, please get in touch if you have any questions

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