The concept of “domicile” is incredibly important when it comes to the laws regarding both succession and taxation.
An individual’s domicile is different to that of their “residency”. The best way in which to describe the difference is that “residency” is a short-term concept, determining each year in isolation as to where, for instance, your income for that year should be taxed. Domicile, on the other hand, is a long-term concept dealing with where you consider your permanent home to be and determining, for instance, where your estate should be taxed and the law of succession that should apply on your death. It is entirely possible to have a different residency and domicile for tax purposes at the same time.
Every individual acquires a “domicile of origin” at the time of their birth. This is usually the same as the domicile of your father at that time, that is, the country that your father considered to be his permanent home at the date of your birth. As a result, your domicile may not be the country where you were born.
Historically, it has been seen as very difficult to change this domicile of origin to a new domicile of choice. A person’s domicile of origin has been said to have an “adhesive” quality, meaning significant changes to an individual’s circumstances would require to be made in order to change one’s domicile accordingly.
Why is domicile so important?
The worldwide estate of any individual who is UK-domiciled is liable for UK inheritance tax. With the UK having the fourth-highest rate of inheritance tax in the world (only Japan, South Korea and France have higher rates), many people whose interests are international in nature are very keen to ensure their estate does not fall within the reaches of HMRC. Additionally, domicile can be of considerable importance within the different nations of the UK. If an individual is deemed to be Scottish-domiciled at death, then their estate will be subject to a claim of legal rights. Such a concept does not exist if the individual was domiciled in England and Wales.
The Spies Who Lost All Their Gold
One of the most famous cases regarding domicile is that of the Welsh actor, Richard Burton. Burton moved to Switzerland in 1957 and spent the final 27 years of his life there in the hope of acquiring a domicile of choice there. He was buried in Switzerland but, as per his final wishes, was buried in a red suit together with a copy of Dylan Thomas’s poems and his coffin draped in a Welsh flag. HMRC successfully argued that Burton had retained his “emotional ties” with Wales, leading to a determination of a UK domicile and an inheritance tax bill of £2.4 million (approximately £9.8 million in today’s money).
The estate of the well-known British financier Sir Charles Clore suffered a similar fate following his death in 1979. He retired to Monaco and either sold or transferred all his business holdings that were previously situated in the UK with the hope of gaining a domicile of choice in the principality. He resigned from all his UK-based chairmanships and sold his house in London, purchasing a new one in Monaco. Despite this, HMRC still successfully determined that Sir Charles had a UK domicile at the time of his death, as he had made it well known in the final years of his life that he hated living in Monaco, did not feel at home and longed to return to England.
In other words, attempts to change domicile are unlikely to succeed, no matter the practical aspects, if the intention (or “the mind and heart”) have not also changed
A recent reversal
Within the last month, the First Tier Tax Tribunal has made a determination that, despite the executors in the estate of an individual claiming that the deceased had retained their domicile of origin at their death, they had, in fact, acquired a UK domicile of choice.
In the case of Shah v HM Revenue and Customs, the tribunal stated that the late Mr Shah “had settled with the intention of remaining permanently in England and so acquired a domicile of choice in England and Wales at some point after 1973”.
There was no clear and definite intention that Mr Shah ever intended to leave the UK and return to India. He was very attached to his family in the UK, and the tribunal “did not consider that it is likely that, at his age and in somewhat indifferent health, [Mr Shah] would have moved from a flat that was close to his son’s house, where he had security as his son owned the property, where he was visited at least once a week by his family who also organised his carers and sometimes shopped for him, to a place that he had never visited, far from any members of his family”.
Getting it right
In each of these cases, the tax liabilities for having a domicile that was not the one hoped for were significant. With an increasingly smaller world and with people often moving constantly either for work or resettlement purposes, it is vital to receive the correct advice in relation to domicile so that such pitfalls can be avoided. The experienced private client team at Burness Paull are on hand to discuss any such matters with you.
