Recent weeks have seen considerable media coverage of the tax treatment of ‘non-doms’.
Domicile is a legal concept that determines the legal system with which an individual has the most appropriate connection. Domicile connects the individual with the country (and thus legal system) in which he or she has a permanent home, or in which he or she lives indefinitely.
It’s best known however as a factor in determining liability to income, capital gains and inheritance tax.
It’s important that advisers are familiar with the concept of domicile and the tax treatment of individuals who are resident in the UK, but domiciled elsewhere.
Actually determining an individual’s domicile can be very difficult
An individual coming to the UK will be regarded as UK domiciled (acquiring a UK domicile of choice) if he or she is physically present here and intends to make the UK their permanent home. The legal principle has been expressed as:
“Every independent person can acquire a domicile of choice by the combination of residence and an intention of permanent or indefinite residence …”
How can intention be determined?
Intention is very difficult to prove (or disprove). Domicile disputes don’t come before the tax tribunals very often, but in the most recent case heard, (Henderson v HM Revenue & Customs) the Henderson family’s ‘history’ was examined in depth from 1930 until the second decade of this century.
The tribunal concluded, “An examination of Nicholas Henderson’s life since 1993 shows a number of factors that point in favour of him having the intention to reside permanently or indefinitely in the UK.”
Nicholas Henderson had been born in Brazil and held a Brazilian passport but had been educated in England and had served for many years in the British Army. While in the army and after his retirement he had homes in England.
How much time and cost was involved in preparing for the tribunal hearing? Surely tens of thousands of pounds - on each side.
The economist and philosopher Adam Smith wrote that a tax system ought to offer certainty:
“The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.…”
Fortunately, the UK has moved to simplify matters
From 6 April 2017 new deemed domicile rules came into force. These provide that an individual who is not domiciled in the UK at common law will be deemed domiciled in the UK for all tax purposes provided one of two conditions have been satisfied.
Either the individual
- was born in the UK
- had a domicile of origin in the UK
- was UK resident for 2017-2018, or later years.
Or, the individual has been UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year.
These changes aren’t perfect - a substantial portion of the Henderson case was devoted to examining Nicholas’ father’s life history to determine if Nicholas had a UK domicile of origin - but they are a considerable improvement on what went before.
Advocates for the changes argued that those who live in the UK on a long-term basis (to use a neutral term) should be taxed in identical ways regardless of their domicile status.
The alternative view is that wealthy non-doms spend a considerable amount while in the UK and contribute to the UK tax take in many other ways - such as through excise duties, VAT, stamp duty land tax - and generate considerable economic activity here. These contributions should be recognised through a ‘tax break’.
These are of course political questions and should there be a change in government further changes are likely. Clients potentially impacted should be kept aware of that possibility.