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The domicile debate

It will have been hard to miss the recent revival of the domicile debate accompanied by potentially misleading headlines suggesting possible wrongdoing.

For decades, centuries even, different governments have tinkered with these rules which essentially provide that those individuals whose origin is not in the UK are taxed in the UK on income and gains generated in this country but are not subject to UK tax on income and gains which arise outside the UK (as is the case for those who are domiciled in this country) until they bring the funds into the UK. While many accuse politicians of preserving a “tax dodge” for wealthy foreigners, savvy economists are aware of the huge financial benefit these individuals bring to the UK in terms of investment, employment and tax revenue on their spend in the UK as well as on their UK income and gains.

As a matter of English common law, there are three types of domicile:

  1. Domicile of origin, which is acquired at birth. A child born to married parents during their father’s lifetime will take the domicile of the father at the date of the child’s birth. A child will otherwise take the domicile of the mother at the date of the child’s birth. A domicile of origin can be displaced by a domicile of dependency or choice.

  2. Domicile of choice, which can be acquired if an individual is physically present in a jurisdiction and has a fixed and settled intention to live there permanently or indefinitely. Intention does not depend on the individual’s wishes in respect of their domicile; it is not an intention to acquire a domicile, but the intention to reside in a particular jurisdiction permanently or indefinitely.

  3. Domicile of dependency, which can be acquired by an unmarried child under the age of 16 where the domicile of their parent changes.

Under English law, it is only possible to have one domicile at a time, and an individual must always be domiciled somewhere. Strictly speaking, an individual is domiciled in England and Wales, Scotland or Northern Ireland, rather than ‘the UK’; although we refer to ‘UK domicile’ for ease of reference.

For UK tax purposes only, there is a separate concept of deemed domicile. This is only relevant if an individual is actually non-UK domiciled under the above rules of common law.

There are limitations on this provision – in terms of cost and time. Non-domiciled individuals who have been resident in the UK for at least:

  • 7 of the previous 9 tax years immediately before the relevant tax year must pay £30,000 annually, or
  • 12 of the previous 14 tax years immediately before the relevant tax year must pay £60,000 annually

to access this treatment.

However, once they have been UK tax resident for 15 of the 20 tax years immediately before the relevant tax year, they become "deemed domiciled" and are no longer eligible to pay this annual lump sum "in lieu" of tax on their foreign income and gains.

What the reporters have not said is that many other jurisdictions including Italy, Spain, Greece, Portugal and the Netherlands accord beneficial tax treatment for wealthy foreigners to encourage investment and spending in that country.

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