The recent Court of Appeal decision on domicile status and how this will impact on you

Domicile - a new consideration

Regular readers will know of the importance of domicile. In tax terms it has two key implications:

If you're UK resident and domiciled you'll usually be subject to UK income tax and capital gains tax ('CGT') on your worldwide income and gains. By contrast if you're UK resident but non UK domiciled you'll only be subject to UK income tax and CGT on overseas income or gains to the extent that you remit income or proceeds to the UK. In essence you could therefore avoid UK tax by retaining overseas income or gains overseas

If you're UK domiciled you'll be within the scope of UK inheritance tax on your worldwide estate, whereas if you're not UK domiciled you'll only be taxed in the UK on your UK estate.

There are also other benefits including the fact that establishing overseas trusts and companies is generally easier than if you're a UK domiciliary.

It can therefore be very beneficial to get yourself classed as a non UK domiciliary.

A case on determining domicile status came before the Court of Appeal in 2006, and it's well worth having a quick review of this to see if it alters anything.

Note this case was actually nothing to do with tax, rather it focussed soley on domicile. If you've read the article 'Could your relations challenge your will' you'll know that the Inheritance (Provision for family and dependents) Act 1975 only applies to English/Welsh domiciliaries, and it was in this context that the court was considering domicile status.

Facts

This case concerned, Mr N who died whilst living in England. He'd originally been born in Cyprus and essentially had lived in England for the last 28 years of his life. Whilst living in the UK he established a very successfull business and acquired a British passport.

He also retained strong connections with his country of birth, and lived in the UK essentially as a Cypriot. He watched Cyprus TV, spoke in Greek with friends , had a Cyprus bank account and sent his daughter to school in Cyprus. He also had to buy to let flats in Cyprus.

After he died his fiance claimed that he was domiciled in England and Wales and that the court had jurisdiction to consider varying his estate.

It is therefore a pretty typical scenario and one that many immigrants into the UK will identify with. In particular whilst they live here, they still retain a strong bond with their overseas country of birth.

How domicile status is determined?

There are usually two main types of domicile.

Firstly there is the domicile of origin. This is the domicile that an individual acquires when they are born. Normally it is the fathers domicile although if the parents aren't married it will be the mothers domicile.

This is the default domicile and this will continue until it is changed. The main way it could be changed would be if an individual acquired a second type of domicile, known as a domicile of choice. This essentially means that a person would need to show a clear intention to live permanently in a new jurisdiciton.

So, a foreigner coming to live in the UK could establish a UK domicile of choice that would over-ride their domicile of origin. This would then continue it is abandoned , in which case the domicile of origin would revive, unless a new domicile of choice in another juridisction was established.

However, it's important to note that it's always been the case that over-riding the domicile of origin is very difficult and is not something that is taken lightly.

In this case Mr N clealy had a Cypriot domicile of origin. In order for his fiancee to be successfull she would need to show that he had established England as his domicile of choice.

The Court of Appeal stated:

'...the court must look back at the whole of Mr N's life, at what he had done with hislife, at what life had done to him and at what were his inferred intentions in order to decide whether he had acquired a domicile of choice in England by the date of his death..'

They then went on to reiterate that a domicile of origin has an 'adhesive' quality and that the burden of proof falls with the person who is arguing for the domicile of choice.

In essence they looked at evidence to substantiate the fact that Mr N was to live permanently or indefinitely in England and they stated that 'clear, cogent and compelling evidence' was required in order to over-ride the domicile of origin.

In this case the Court of appeal found that Mr N was a non UK domiciliary, although to be honest this was pretty much expected, and is in line with the position prior to the case. The comments of the judges though are useful to bear in mind, and it should also be noted that there were no definite intentions to eventually return to Cyprus. The fact that there were strong links with Cyprus and the lack of any strong evidence from his fiancee to fix his permanent residence in the UK seems to have swung the balance in favour of non UK domicile status.

Based on this most foreign nationals in similar positions and with strong overseas links should feel more confident in their non domiciled status.