Tax Planning and Understanding Your Status Part 2

Part two of why residence and domicile are of importance when it comes to offshore tax planning.

All about ‘Domicile’...

Domicile is important for inheritance or estate tax planning purposes and also when it comes to the legality and benefit of any offshore tax planning. 

A dictionary definition of domicile is not exactly the same as the UK Inland Revenue’s definition of domicile so beware and check how your home country defines the term!  A dictionary classes domicile to be: -
“the place where an individual has a fixed and permanent home for legal purposes also called legal residence”.

The UK Inland Revenue on the other hand don’t necessarily accept your nationality or citizenship to be a definite reflection of your domicile.

As mentioned in part one of this article series, it is possible to be resident in two countries at once; furthermore it is not terribly difficult to change your country of residence.  In comparison, a person can only be domiciled in one country at a time and it is significantly trickier to change your domicile once it has been established!

There are four types of domicile; origin, dependency, choice and deemed.

Domicile of Origin - This is acquired at birth.  Generally speaking it is inherited from the father’s domicile (or mother’s if she is unmarried) and it remains the domicile unless the person forces a change of domicile during their life time. 

Domicile of origin would always be reverted to if ever someone were to revoke a domicile they had previously changed to.

This can mean that if your father were UK domiciled at the time of your birth but you have been living in Germany say, for the past 50 years, you could still be UK domiciled for the sake of inheritance tax liability.

Domicile of Dependency - This only applies to children and remains up to the age of 16.  If the child’s father changes his domicile of origin to a domicile of choice (see below) then the child ‘adopts’ the domicile of choice as his domicile of dependency while he remains his parent’s dependant - i.e., until he is 16.  Obviously, if the child’s parents are unmarried, this can be applicable to his mother’s domicile rather than his father’s.

At the age of 16 this domicile of dependency either becomes his domicile of choice - or his domicile of origin (his father or mother’s domicile of origin) is revived.

Domicile of Choice - To change domicile a person has to make a new country his permanent residence and he has to ‘intend’ to remain there until his death - baring unforeseen circumstances of course.

If you manage to change your domicile in this way it is very difficult to change it again.  So it is not a step to be taken all that lightly!  That said, it is slightly easier to revert back to your domicile of origin if you were to change your mind.

Deemed Domicile - For UK inheritance tax purposes only, this final type of domicile can be applicable. 

If a person dies and has changed their domicile from the UK in the past three years they will be deemed UK domicile for IHT purposes.  Furthermore, a person can be deemed UK domicile at death for IHT purposes on worldwide assets if they have simply been resident in the UK for 17 out of the last 20 years of their life.

When it comes to tax planning - whether you are ‘offshore’ or not and whether you have the expat advantage or not - it may be possible to utilise your status and reduce your taxation liability. 

Contact us if you feel we can assist you further
let us know in confidence about your situation and we will see if and how we can assist you further.