Domicile vs residency
 

Hi everyone. I just joined the forum and decided to create a new post to discuss domicile vs residence, as I recently learned from a lot of research the two are very different, and the tax (specifically, inheritance tax when it comes to domicile) implications can be significant. I'm by no means an expert on this, and if you are, please step in and correct me. This is just my formed opinion based on my own research. This post is not about "non-doms" who are tax residents in the UK. It's about those who have emigrated from the UK permanently, and in particular, if you have a UK "Domicile of Origin" (born in the UK to a UK-born father, or mother in some cases), but have since displaced (theoretically) that with a "Domicile of Choice" in your new country.

Why does this matter? Well, since the UK Statutory Residence Test (SRT) came into affect in 2013, determining your tax residency is fairly straight forward for most people. This is what I've always assumed is all that mattered concerning UK taxes being a 30+ year resident in the US with no intensions to ever return to the UK to live, and having no property or other assets in the UK. What you may not know that even if you've resided and permanently settled for decades in another country with no intention of ever returning to the UK to live, it's still possible to still be considered domiciled in the UK, making your worldwide assets subject to inheritance tax, which is very high in the UK (40% over the exemption amount) compared to the US. Defending your domicile of choice comes down to at a bare minimum being a tax resident in your new country and having the intention to remain there permanently. But in reality, you need to clearly establish through your actions your new country is your settled home, while severing all possible ties with the UK.

From what I've learned, displacing your domicile of origin with your domicile of choice can be quite difficult, and is matter of English common law, and can be subjective. It is separate from your tax residence and citizenship/nationality status. The standard for defending a domicile of choice could be, depending what you read, a "balance of the probabilities" to "beyond a reasonable doubt" that you've displaced your domicile of origin. What's worse is, you're estate more likely to be challenged by HMRC after you've died, leaving your heirs to defend your estate overseas.

The bottom line is if you have no plans to return to the UK to live, or do not have any ongoing business, assets, or other ties in the UK that might make you considered domiciled there, regardless of how many years you've lived outside the UK, I highly recommend you familiarize yourself with the concept of UK domicile to minimize the risk of being considered domiciled in the UK and thus protect your estate.

Re: Domicile vs residency
 

You are quite right, especially your last two paragraphs, and not only can it be quite difficult to replace a domicile of origin with a domicile of choice, but you can reverse that change very easily - most notably for example by deciding, as you approach the end of your life, that you would like to return "home" to die. No matter how fastidious you have been about severing links and ties to your country of birth, you can undo that very very easily in your final days.

The extent to which inheritance tax will affect your estate depends on your estate's value (it would have to exceed IIRC £325k), and generally you would need assets that are not your primary residence, as that can be further excluded, if left to your spouse and/or children, and anything else left to your spouse is likely going to be excluded - I assume the logic to this, from the HMRC's persepctive is that they'll get their cut when your spouse dies, but those of us with a non-British spouse will, if we leave our estate primarily to our spouse and predecease them, move our estate out of the grasp of HMRC.

Re: Domicile vs residency
 

Not only returning “home” to die… even being sent back to be buried… I assume even a desire to have ashes scattered could trigger it…

https://www.blevinsfranks.com/uk-dom...s-expatriates/

Re: Domicile vs residency
 

It certainly appears that way.

I've was researching whether to pay voluntary NI contributions to add to the 4-5 years I accumulated in the UK before leaving for the US in the 80's, to get to 10 years and qualify for a UK state pension. But I figure getting ~ $50/week (offset by WEP) it's not worth it to me in relation to risking my estate to UK inheritance tax. Is it a risk to "domicile of choice" to draw a UK state pension? I don't know. That's the nasty thing about the UK domicile, it's not clear cut.

From some of the more in-depth things I've read, for example, renouncing you UK citizenship will likely change nothing (if you were born with it, you didn't seek to obtain it), and you likely wouldn't lose your UK domicile of origin by renouncing it, but holding a current (or renewing) a UK passport, rather than travelling on your settled country's passport, could be counted as maintaining a tie to the UK (I'll say it again: this is an opinion, not legal advice), because it shows intent. That alone would unlikely be enough to revive a domicile of origin, but it could be a factor amongst others.

Re: Domicile vs residency
 

What if I leave my assets to my children, born in the USA, but have dual citizenship US/UK - will that be excluded from the estate? Will they become subject to inheritance tax in the UK at some later date because I got them UK passports?

Re: Domicile vs residency
 

In my non-professional opinion, where your children were born or what passports they hold is irreverent. It’s your domicile status when you pass away that matters, and that determines where your estate will be taxed. The terminology can be confusing because in the US, inheritance tax (applicable to certain US states) is paid by the heirs, and estate tax is assessed against the deceased’s estate. In the UK, inheritance tax is what what would be called estate tax in the US.

Re: Domicile vs residency
 

I am in no way truly knowledgeable in UK inheritance and decedent estate law. But I do have a law degree from a Common Law jurisdiction. (United States in general, California specifically). As you note, “domicile” and “residence” are Common Law concepts. Both are terms which lawyers are trained. You state that it is “quite difficult” to obtain a domicile of choice, but state no support for that conclusion.

In training, we were taught that every one has ONE domicile. In contrast, “residence” may be zero to multiple.

In my own family, we faced this when my mother-in-law passed away. She was a long term California domiciliary. California abolished inheritance taxes. For purposes of providing medical care, her children move her to a state which has an inheritance tax. She passed away there and, sure enough, the later state claimed she died domiciled there. Merrill Lynch insisted on tax clearances to release assets. We could have litigated but ultimately decided not to.

Re: Domicile vs residency
 

I agree.

While we were living in the USA our beneficiaries were our children who also lived in the USA so unless we had asked to be buried in the UK then the UK authorities would have no involvement at all when we died.

As it happens we decided to move back after nearly 30 years even though it was never in our plans. IHT brings in about 0.75% of HMRC's tax revenue so it is really quite small from a macro view. (£5.4B of £718.2B).

A married couple with a house that is passed to their children have a tax free threshold of £1m which these days can be a problem to those with high value houses. Pension pots (e.g. SIPPs) are exempt and I think the maximum value of all pensions including SIPPs is currently £1,073,100 per person. So a retired professional couple who never had a traditional pension could have over £2m in investable assets that are exempt from IHT in addition to their regular exemption of £1m. I don't know if "retirement accounts" extends to foreign pension accounts such as IRAs.

My wife and I would leave an estate that would be a little over the IHT threshold if we died today. We have 2 children, in their 40s, and we have been gifting money to them this last few years, about $500k and we continue to gift $30k/year each as we do not need the savings we have accumulated because between us we have 4 private pensions and 4 State pensions which provide more than enough for our needs. Unlike the IRS which requires reporting of all gifts over about $15k per person HMRC only requires a report of gifts over the 7 years preceding the death, and there are no limits to how much can be gifted. If you die within 3 years of making a gift then the full 40% of IHT is payable by the estate, then it tapers off to zero after 7 years. For example, shortly after the death of the father of the then PM, David Cameron, his mother gifted him £500,000.

I maintain a spreadsheet which is an identical copy of IHT103, the form used by the executor of a will to report gifts, and each year print off the latest version and keep it with our wills in order to make it easier for the executor (currently our son who lives in England).

https://www.gov.uk/government/public...f-value-iht403

Re: Domicile vs residency
 

(My post you quoted had a typo: I meant irrelevant, not irreverent).

That’s interesting about the higher combined limits. It must of been adjustment moving back after all that time? Having lived in the US for so long, when visiting the UK for a week or two every few years, it feels like I’m a foreigner while I’m there.

Re: Domicile vs residency
 

The "problem" is that while the percentage of government revenue derived from IHT is small, the number of people who pay any IHT is orders of magnitude smaller - I seem to recall reading a few years ago that the numbers were in the low thousands range (though the rise in house prices might change that unless the IHT exemptions are raised in line with house prices), so tax payers on average benefit considerably by the very small numbers of IHT payers coughing up $5bn. The same article noted that IHT is effectively a voluntary tax anyway, given the ways that IHT liablbility can easily be avoided, which is what most of those who could potentially be liable for very large amounts of IHT do, reducing their estate to the point where little or no IHT will be due upon death.

Re: Domicile vs residency
 

In review of OP’s first post, I had the impression that she did “careful research” for correct information, but did not quite string it together correctly. As noted, “domicile” is a Common Law concept. Each the United States (except Louisiana to an extent) is a Common Law jurisdiction and under the federal system may be treated as separate countries for many purposes.

I ran across this LINK from Nolo Press which is long established as law for laypeople. I found this discussion of domicile to be quite informative. I submit that it is quite likely that it will aid in careful research of UK law.

Re: Domicile vs residency
 

Appologies, I (he vs she, BTW) couldn’t post links at the time of the initial post. I also came across that concept regarding federal systems and that states are regarded as separate domiciles. Obviously my post was in relation to UK Domicile and case law for those who have permanently expatriated. Even relocating to another state (if you have a UK domicile of origin), will displace the original state domicile of choice and revive a UK domicile of origin, unless intent to remain in the new state is clearly established. Searching “defending domicile of choice” I found this one particularly useful:

https://htj.tax/2021/10/moving-to-th...-a-uk-citizen/
(this obviously covers “moving to the UK…” but the explanations I liked).

This was useful (but slightly dated) regarding considering one’s ties to the UK with regard to domicile:

https://cornerstonewills.co.uk/wp-co...8/Domicile.pdf

Re: Domicile vs residency
 

Interesting links. It seems that “domicile of origin” is particularly sticky in the UK compared to the US.

It seems to be general agreement that a person has but one domicile at any given time. But this brings up issues of “conflicts of law.” The American Bar Association published this article on relevant conflicts principles including domicile. Now what happens if, let’s say, a New York Court of competent jurisdiction finds NY domicile while a UK court finds UK domicile? Bet there is case law about who should defer to the other. Not going to research that one. The key term might be “comity.”

Re: Domicile vs residency
 

A little more opinion from my research: I discovered the US has an Estate and Gift Tax Treaty (AKA the "domicile treaty") with the UK (and many other countries). Since all US Citizens and LPRs are considered US-domiciled for life under US tax law, regardless of place of residence, the treaty would come into play should the UK also assert someone is UK-domiciled under the UK's domicile laws. Since a person can only have one domicile, the treaty determines which country will have taxing rights at the exclusion of the other (with the exception of "fixed" assets, such as land or real estate, that are located in the non-domicile country)..

A text of the treaty is here. Scroll down to "ARTICLE 4 FISCAL DOMICILE" to jump to the domicile tests. As you'll see, citizenship status (USC vs LPR, dual citizenship) is quite relevant in how far down the tests you need to go to determine domicile, and they become somewhat more subjective once you move out of the tests involving citizenship and residency, which you will if you're a dual citizen!

Re: Domicile vs residency
 

Interesting. What is your source for your statement that AmCits and LPR's are considered domiciled in the the US for purposes of tax laws. And what is the jurisdiction that so considers that.