How does Domicile of Choice work?

Home is where the heart is. 

And it really can be, but when it comes to the nitty gritty legality of it all, the government likes to know exactly where you consider your permanent home. It’s called your domicile. So while you consider where you grew up or where your family is from your home, your domicile refers to a place you permanently reside and have a strong connection with. 

Depending on what your domicile is, you’ll be subject to different tax regulations. 

What is domicile of origin?

Most of the time, your domicile of origin is the same place as your parents’ domicile. It’s usually your father’s domicile, but if your parents weren’t legally together when you were born, then your mother’s domicile decides it. While the topic is vague (and as ever from HMRC, quite complicated), just know that it’s separate from your nationality, citizenship, or residence. 

Let’s take a look at this example to wrap our heads around it.

And what about domicile of choice?

A domicile of choice is essentially just changing your domicile from your domicile of origin to another country. When you decide you want to acquire a domicile of choice, two things need to happen: 

• You need to make your intention clear 
• You  need to have permanent residence in the country you’ve chosen 

These are the minimum requirements that would allow the government to consider your new home as your domicile of choice. Here’s how it works:

Clear intention

• You need to be committed to living in the new country for the indefinite future as a permanent citizen and not intend to come back to the UK.

To do this, you need to demonstrate that you intend to remain in your chosen country indefinitely. This means minimising your connections with the UK, or your domicile of origin. *Cue dramatic music*

Residency

• Domicile of choice can only be acquired if you’re a tax resident in your new country and intend to make it your permanent home.

There’s no amount of time you should wait to start the process, which can sometimes take years. And you only need to be intentional in your actions to leave the UK and reside elsewhere.

Here’s what we mean.

What are declarations of intentions

It’s easy to say “I’m deciding to make this my permanent home” and then just get on with it. But unfortunately, this alone isn’t good enough to change your domicile. You must prove that this new country is the one you plan to settle in.

Some examples include:

It’s all these considered together that allow you to officially “belong” somewhere else. With these declarations and your actions, the government will make a decision as to whether or not you can acquire a domicile of choice.

HMRC may launch an enquiry about your status and may require various questions answered and documents from you. You can find the full list here. 

What does domicile of choice have to do with tax?

Good question. If you’re trying to shed your domicile of origin, you need to be committed. There are things you can do, like the declarations of intention, that act as evidence that you intend to make the overseas country your domicile of choice. 

If you acquire domicile of choice outside the UK:

• You are no longer required to pay UK taxes (woohoo!)

• You will have to pay taxes in the country where you reside (sob)

If your domicile of origin is the UK, you will be liable to the usual taxes:

• Income Tax

• Capital Gains Tax

• Inheritance Tax (IHT) – even on any global assets

What’s Inheritance Tax got to do with anything?

Once your domicile is no longer the UK, the 40% IHT rate no longer applies to your assets abroad. 

If someone with a domicile of choice outside of the UK dies, they would only have to pay UK taxes on assets in the UK. These include taxes on their UK property or bank accounts, but nothing abroad. 

However if your domicile is considered the UK, you pay UK taxes on all your worldwide assets. If you own properties globally, you’re subject to 40% IHT on each one. There is a £325,000 tax-free IHT allowance, so it’s worth taking advantage of it!

If you’re a non-domiciled person, you probably won’t need to pay UK tax. You just have to satisfy these conditions. You might be liable to pay UK taxes depending on your status, which we’ve clarified below.

What happens if I leave my domicile of choice?

In situations where your domicile of choice is no longer a permanent option, your domicile of origin is activated. If you leave your domicile of choice to a country other than your domicile of origin, you can acquire domicile of choice for the new country. But, if you don’t do this immediately, you’re reinstated automatically with your domicile of origin.