How To Manage A Domicile Enquiry

Recent years have seen a significant increase in HMRC enquiries into domicile status. Areas of focus include:

long-term UK residents who claim not to have acquired a UK domicile of choice; individuals with a UK domicile of origin who return to the UK but maintain they have not abandoned a domicile of choice acquired in another jurisdiction; and children who claim foreign domicile by reference to the domicile of a parent or grandparent despite never having resided outside the UK (e.g. Henderson v HMRC [2017] UKFTT 556). These enquiries present particular challenges (often due to the age and scope of potentially relevant material) and require careful management.

What is domicile, and why is it still relevant?

Domicile is a common law concept that is critical to an individual's CGT, IHT and income tax treatment. Domicile is acquired in one of three ways:

domicile of origin: acquired at birth (typically from one's father); domicile of dependency: acquired by a dependent person from the person on whom they are dependent (e.g. a child under 16 from their relevant parent); and domicile of choice: a new domicile can be acquired by choice, through a combination of actual residence and a fixed and settled intention of permanent or indefinite residence. From 6 April 2017, certain individuals who are non-UK domiciled at common law are deemed UK domiciled for tax purposes (in particular by virtue of long-term UK residence). However, the common law position remains relevant. First, there is a significant tail of outstanding domicile enquiries for prior periods. Second, under the new rules, the conditions for deemed domicile may not be met. And third, individuals who are deemed UK domiciled can potentially access favourable tax treatments not available to those who are actually UK domiciled.

For example, there is a longstanding 'rebasing' relief for gains realised by offshore trusts, if 'matched' to a distribution to a beneficiary who is non-UK domiciled; and a more recently introduced 'rebasing' relief in relation to personally held non-UK assets of non-UK domiciled individuals. And perhaps most importantly, the 'protected settlement' provisions, which prevent arising basis taxation of settlors on the income and gains of offshore trusts they have created, only apply for as long as those settlors continue to be non-UK domiciled. For the purposes of these reliefs, common law domicile is crucial.

Too much information?

Domicile enquiries typically start with a relatively short list of questions from HMRC about basic facts in the taxpayer's life. However, they tend rapidly to fan out from there...