The government has now published its consultation document outlining its intentions regarding the taxation of those people who are resident in the UK but who have a domicile elsewhere. It contains mixed news, depending on your particular circumstances.
One of the most immediately obvious changes is that someone whose domicile is elsewhere will be deemed to have acquired a domicile in the UK (in England & Wales, or Scotland or Northern Ireland, to be precise) once they have been resident in the UK for 15 out of the last 20 tax years.
Case Study
Francesco was born in Italy and has (under England & Wales law) an Italian domicile of origin. He came to live and work here in the 1980s. He retains both business interests and real estate in Italy, as well as in England. The 15 years out of the last 20 rule will obviously apply to him as soon as the new principle becomes law and he would become deemed-domiciled here for income tax, capital gains tax and inheritance tax at that point. Fortunately, Francesco has created trusts of excluded property (property located outside the UK) over all his Italian assets and these will remain unaffected by the new regime, although any beneficiaries of the trusts who are domiciled, or become deemed-domiciled, here will be taxed on any UK receipts from those trusts.
If Francesco wished to escape the effects of the new regime, he would have to leave the UK for 6 years. Given his family and business ties here, that may simply not be feasible. As a general point, once a non-UK domiciled person has been resident here for 8 years, they would have to leave for at least 6 years in order to escape being deemed-domiciled here. However, a peculiarity of the maths is that if they leave during the 7th year, they need only be away for 3 years before returning. Part years of residence will count as full years for this purpose.
If Francesco did move abroad after becoming deemed-domiciled here, his deemed-domiciled status would cease immediately for income tax and capital gains tax purposes, although it would remain for inheritance tax purposes for 6 years. (The government also proposes to change the rules for people with a domicile of origin in the UK who become resident abroad to align with this principle).
However, even under the new rules Francesco could make a potentially exempt transfer of excluded property before he becomes deemed-domiciled and the property would then be outside his estate on his death, even if he were to die within 7 years of making the transfer
Maria’s position, though, is very different. Although her mother was Italian, she was born in the UK to a father who was England & Wales domiciled and she therefore inherited her father’s domicile of origin. After university, she moved to Italy where she married and then worked in her husband’s business, in which she is now a partner. They are considering moving to London and opening up another business along the same lines as the Italian one. Although she has acquired an Italian domicile of choice, on her return to the UK she will be treated as domiciled here, even if her intention is not to reside here permanently or indefinitely. All her worldwide income and gains (including those from the Italian company) will become taxable here. The fact that she has retained real estate in Italy with the intention of moving back there one day will not help her. She will be treated as having a domicile of origin here at any time she is tax resident here. Furthermore, any trusts of excluded property she created whilst she was living in Italy will cease to be treated as excluded property and become taxable in the UK. However, any such trust would cease to be taxable here as soon as Maria went back to Italy and became tax-resident there. The trap to beware of is that, if a ten-year anniversary of a trust falls at a time when she is resident here, then a ten-year tax charge may be payable. Adequate records for this purpose may not have been kept because it was not anticipated that the trusts would ever become taxable under the UK’s relevant property regime when they were first created.
Bizarrely, even though her husband, Michael, inherited his father’s England & Wales domicile; because he was born in Italy, the new regime will not apply to him. The Italian domicile of choice which he has since acquired will still apply once he moves to the UK and the trust of excluded property which he has created over his Italian assets will remain excluded property, as long as he does not move here with the intention of remaining permanently or indefinitely. So her profits from the Italian business would be taxable here, his would not.
A final curious consequence of the new rules stems from the fact that any child of Francesco’s born here will be deemed-domiciled here on reaching their 15th birthday, under the 15 years out of 20 rule, unless they go abroad for at least 6 years before that point. But this deemed-domiciled status will not be passed to their own children, even if they are born here. Instead, those children would be born with an Italian domicile of origin and only become deemed-domiciled here on their 15th birthday (as explained above). There is no limit to how far down the generations this rule will reach.
This note does not constitute legal advice but is intended as general guidance only. If you would like further information please contact Robert Macro, Head of Private Client.
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