One of the main headlines coming from the first (solely) Conservative budget since 1996 was the abolishment of permanent non-dom tax status from April 2017. Chancellor George Osborne says this is part of a crackdown on "fundamental unfairness" in the tax regime for wealthy foreigners and will raise £1.5 billion over the course of this parliament. Non-dom refers to a person's domicile status which has various implications in tax law as well as in family law.
What is domicile?
In English law domicile describes the relationship between a person and a country essentially where a person bona fide calls "home". It is distinct and can be different to a person's nationality. A person's domicile will usually be the country to to which they are most connected by their actions, attitudes, commitments and other choices. Domicile is created at birth but can be displaced by choice. It is a factual question albeit guided by the law on domicile.
Domicile has important implications in fiscal matters, including tax planning and inheritance tax as well as in family law. It is a concept quite perculiar to the UK and Ireland and is almost wholly treated differently across the EU and rest of the world. The UK has its own internal law in deciding whether someone is domiciled in the UK and specialist advice should alwats be sought before committing to a domicile for a particular purpose as it may have a wide-ranging knock-on effect.
A number of factors contribute to whether a person can be described as being domiciled in a country. Whilst domicile is a complex legal and factual matter, a few guiding principles can assist in determining domicile:
- Everyone always has one domicile. Nobody has no domicile. Nobody can have more than one domicile;
- Domicile begins with domicile of origin but can change by domicile of choice or (very occasionally) domicile of dependence);
- A domicile cannot be lost without another domicile replacing it;
- Domicile of origin is acquired at birth from a person's father;
- Domicile of origin continues until a domicile of choice is adopted by a person's attitudes and residence in a particular country including an intention of permanent or indefinite residence;
- In the event that a domicile of choice is lost, domicile reverts to a domicile of origin unless and until another domicile of choice can be asserted, but the threshold for doing so is high;
- The presumption in law is that a person retains their domicile of origin and it is for the person asserting 'domicile of choice' to prove that the person's domicile has changed.
Domicile in Family Law
The most notable interplay between domicile and family law is the impact of domicile on jurisdiction for divorce. Partners in international families may be able to divorce in more than one country. Financial outcomes on divorce vary widely between different countries and it may be more advantageous to divorce in one country more than another. Even as between, for example. England and France, the financial outcomes on divorce vary distinctly (for example spousal maintenance and the types of asset available for distribution are sometimes treated very differently between those countries).
In order to divorce in a particular country a spouse must show a connection to the country. Within the EU, which of course includes the UK, the rules are goverened by the Brussels II Regulation. This sets out a checklist of connecting factors which may arise between married parties and a particular country. Crucial amongst these factors, but only in the UK and Ireland (and not the rest of the EU) is domicile as opposed to nationality. The domicile of both parties to a marriage is a jurisdictional ground upon which a divorce can be sought and the domicile of one party can in some instances also provide adequate jurisdiction. It is within this context that domicile has important family law implications.
Non-dom status - what does it mean?
An non-dom is someone living in the UK who is domiciled outside the UK. These individuals pay income tax and capital gains tax only on earnings generated in or money brought into the UK. Any income generated or money held outside the UK is non-taxable.
Non-dom status is generally favourable from a UK tax perspective. In particular, it allows individuals to opt into the "remittance basis" of taxation. For individuals using the remittance basis, their foreign income and foreign chargeable gains (for non-UK domiciled individuals only) are subject to UK income tax or capital gains tax only when 'remitted' to the UK.
The Chancellor told MPs that "fundamentally, it is not fair that people live in this country for very long periods of their lives, benefit from our public services, and yet operate under different tax rules from everyone else. Non-dom status was meant to be temporary, but it become permanent for some people".
Changes to the non-dom system
After April 2017:
- Anyone living in Britain for more than 15 years out of 20 years will lose their non-dom status;
- People born in Britain to UK-domiciled parents (essentially those with a UK domicile of origin) would not be allowed to have non-dom status if they lived in the UK;
- Anyone who owns UK residential property and would otherwise pay inheritance tax on the property cannot avoid the tax by holding it in an offshore company.
Many see the non-dom status as unique quirk of the UK tax system, which allows wealthy individuals to be born, raised and reside in the UK but to pay far less tax than a typical UK tax payer. The Chancellor, however, has decided not to abolish the non-dom tax status completely because he says it "would cost the country money" adding many individuals that took advantage of the tax status "make a considerable contribution to public life".
Domicile is a complex legal and factual concept with wide-ranging fiscal and family law effects. a nomination of domicile for one purpose may influence another aspect. It can form the grounds for a divorce in the UK which will, in turn, affect the financial outcome of that divorce. As the recent budget has indicated, a person's domicile has wide fiscal implications as well. Guidance should always be sought from specialist tax and family law advisors before committing to a domicile.
The International Family Law Group LLP specialised in divorce and family matters in the international context. If you have any queries with regard to your domicile and how it may impact on relationship breakdown, or with regard to any other family law matter, please contact us. To do so by email please click here.