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Malcolm Finney outlines the concept of domicile, and explains the meaning - and potential tax implications of - ‘domicile of origin’.

Background

Domicile is absolutely critical in determining an individual’s potential liability to the various UK taxes. The Finance Act 2008 has made significant changes to those individuals who are non-UK domiciled but UK resident. The concept of domicile as understood for UK purposes is very different from that understood by those individuals from civil law jurisdictions. As a consequence, confusion on the part of such individuals is not uncommon (or indeed surprising).
 
The concept of domicile is a private international law concept, not a tax concept. The relevant rules are thus those of private international law.

To determine an individual’s current domicile status requires that the individual’s domicile of origin is first determined.

To some degree the concept of domicile of origin is somewhat archaic but nevertheless continues to be applicable according to historic case law.

This article looks at the domicile of origin concept and the rules applicable thereto all of which derive from previous case law (a much more detailed analysis of the domicile concept appears in the book).

General rule

An individual’s domicile is generally equated to the location of his permanent home.

However, with respect to an individual’s domicile of origin this is a concept of law and is determined at birth by law and may have no direct connection with the location of a permanent home. Accordingly, an individual’s domicile of origin may be that of a country where the individual has never visited and in which no permanent home exists. This may in particular be the case where, for example, a couple may have fled persecution in their country of nationality to reside in the UK and subsequently have had children who may to date never have actually been to their country of domicile (typically, their parents’ country of nationality).

Legitimate v illegitimate child

The domicile of origin of a child is determined at birth by the domicile of the father if the child is legitimate, or that of the mother if illegitimate.

A child is legitimate if born in wedlock (i.e., born of a marriage valid under English law). An illegitimate child is thus one born to parents who are not married to each other (or whose marriage has been declared void under English law).

However, the position in Scotland has recently changed following the Family Law (Scotland) Act 2006. Under this Act the status of illegitimacy is abolished and thus the child’s domicile status is now determined in the same manner irrespective of whether the child is legitimate or not.

It is important to appreciate that the concept of a “UK” domicile is meaningless. An individual is domiciled in England/Wales, Scotland or Northern Ireland. This can be important (not so much re taxation, as the same rules apply in each of these countries) but with respect to, for example, inheritance and/or claiming against a deceased’s estate due to lack of financial provision.

Although an individual may be illegitimate at birth, subsequent legitimation may cause the child’s domicile of origin to be displaced. Whilst retaining the domicile of origin derived from the mother (as the child was illegitimate at birth) it becomes displaced by a domicile of dependence which will be that of his father (during his father’s lifetime). In the event of the father’s death, however, the child’s domicile of dependence would revert to that of the mother.

On attaining age 16 a child’s domicile of dependence ceases and becomes that child’s domicile of choice.

Loss of domicile of origin

A domicile of origin is fixed for life and cannot be lost by mere abandonment; it needs to be positively displaced. It is very cohesive in nature but it can be displaced by the individual acquiring a domicile of choice, or if the individual is a child, by the child acquiring a domicile of dependence.

A domicile of origin will not, however, be lost even if the individual has in fact left the country of this domicile and has no intention of returning to it until a domicile of choice in another country has been acquired.

Resurrection of the domicile of origin

Even where a domicile of choice has displaced a domicile of origin, (e.g., if the individual emigrates from the UK, acquiring a domicile of choice in a new country), the individual’s UK domicile of origin may be resurrected at any time in the future. For it to resurrect would require that the domicile of choice be abandoned without, at the same time, a new domicile of choice having immediately been acquired.

Thus, the lack of abandonment of an acquired domicile of choice precludes the domicile of origin resurrecting.

In essence, a domicile of origin may thus be displaced but it remains, as it were, in the background in abeyance waiting for resurrection if the facts support such resurrection.

However, in one circumstance only, a domicile of origin can actually be replaced and not just displaced. In this case the individual’s domicile of origin (i.e., the domicile acquired at birth) literally no longer is deemed to exist, having been totally replaced by a "replacement domicile of origin".

This occurs where a child is adopted.

An adopted person is treated in law as if the person is the legitimate child of the adopter(s) (i.e., the adopted child is treated in law as born to the adopter(s) in wedlock).Thus, an adopted child’s “original” domicile of origin (i.e., the domicile acquired at birth) is replaced by a “new” replacement domicile of origin.

The adopted child’s “new” domicile of origin is generally accepted as being determined at the time of the child’s birth. The child’s “new” domicile of origin is that of the adopting father (assuming, for example, a married couple adopt jointly).

Implication for the non-UK domiciled but UK resident individual

As a general rule non-UK domiciliary status is something to be retained. The acquisition of a UK domicile of choice is generally undesirable.

For those individuals who, on taking up residence in the UK possess, for example, a non-UK domicile of origin it is important not to do (or indeed say) anything which might jeopardise this status. In particular, if non-UK domicile status is to be retained then at no point should the individual indicate an intention to remain in the UK indefinitely; this would cause a UK domicile of choice to arise.

In general it is extremely difficult for HMRC to be able to argue successfully that this has occurred; nevertheless it is by no means impossible.

Length of residence in the UK is not, per se, material nor is the acquisition of British citizenship. Execution of a will under UK law should be avoided unless it relates to UK real estate.

Form DOM1 is typically sent to new arrivals (along with Form P86) for completion. This is not a statutory form and there is therefore no requirement for it to be completed.

For the “long termers”, “deemed UK domicile” status may automatically arise but this is only applicable for inheritance tax purposes (a double tax agreement to which the UK is a party may override this rule). It has no bearing on the individual’s status for common law purposes.

Deemed domicile status arises where the individual has been UK resident for at least 17 out of 20 tax years. Perhaps the only advantage of this status arising is where the individual concerned is married to a UK-domiciled spouse and the inter-spouse £55,000 exemption limit is then no longer in point (i.e., unlimited inter-spouse inheritance tax free transfers permitted).

In principle, it is probably preferable to take action prior to this status arising (e.g., settling offshore property on trust).

Whilst non-UK domicile status is, generally speaking, a status to be preserved, following FA 2008 and the significant changes introduced it may not now always be effective to continue to be taxed on the remittance basis (which now requires for most a formal claim); in particular this may be so where the £30,000 so-called remittance basis charge is in point.

In short, in the post FA 2008 world domicile as a concept is more important than ever.

This article (the first in a series of three) is based on the author’s recently published book “Wealth Management Planning: The UK Tax Principles” published by Wiley & Sons and available here.