Domicile Meaning for British Expats
Only when you move abroad does domicile usually take center stage. That applies to non residents living in Britain, as well as Brits abroad.
If you look up domicile in a dictionary you’ll usually get something along the following lines (from Merriam Webster):
“a dwelling: place of residence: home,”
“a person’s fixed, permanent, and principal home for legal purposes.”
Domicile vs Residence
Notice there are two. Any expat should probably take note of the second of those. But you may also notice that they sound a lot like how you might describe residence too.
And though domicile is related to residence it is not the same.
Both of these terms have legal meanings. But domicile is usually where you were born and residence is usually where you live.
Most people live in the country where they were born so they don’t have to think about the differences. But expats do need to be aware of the difference because they can impact the taxes you pay.
When you earn money above a certain amount you become liable to pay tax. Usually, you pay tax to the government of the country, where you earned the money.
So let’s say you are a British expat living and working in country A who has a savings account and a buy-to-let property back in Britain.
This usually means you are resident in country A but you are domiciled in the UK.
It also means you will be liable to pay tax in both countries, but your domicile status is unimportant here.
You will be liable for income tax on your salary, which will be payable to the to country A’s government i.e. where you are resident. You will also be liable for income tax on your interest payments from your savings account and the rental income from you buy-to-let, which will be payable to the UK government.
This isn’t because you are domiciled in the UK, rather it is because you are generating income in the UK.
Depending on the exact policies of country A, you may also have to pay tax on all this income that you generate in the UK. In many cases there will be a tax treaty or similar that will mean you only pay tax once, but this isn’t always the case.
For most people, it doesn’t usually have to get much more complicated than this.
The main place people are likely to run in to issues with their domicile is with inheritance tax, so here’s a quick low down of how that works:
Inheritance Tax
Inheritance Tax is a tax on the estate (money, investments, houses etc) of somebody who’s passed away.
If you have a lot of assets that you intend to pass on to others inheritance tax is something you need to think about.
As far as the UK government is concerned, it comes into play at £325,000, so if the value of the your total assets (property, money and other possessions) is less than £325,000 there’s usually no inheritance tax to pay in the UK.
Amounts above £325,000 still may not be subject to inheritance tax if they are left to the your spouse, civil partner, a charity or community amateur sports club.
Whereas income tax needs to be paid in the country where you earned the money and/or your country of residence, inheritance tax is a little different. Governments don’t care where your assets are.
As a result UK domiciles will be subject to UK inheritance tax no matter they live and no matter where their assets are.
For this very reason, some British expats with large estates may even change their domicile (I’ll come to this later).
Even if your domicile is not the UK, your UK assets would still be liable. The only way you would avoid UK inheritance tax for sure would be to change your domicile and only have assets abroad.
If your domicile is outside the UK, you are only liable for UK estate tax on your UK assets. But if your domicile is the UK, you will be liable for UK estate tax on your entire estate no matter whether it is UK based or not. In fact if you are UK domiciled where you are, where your assets are or where your heirs are is of no consequence.
And this is where people may run into issues because the place where they are resident, and any additional countries where assets are based may have similar rules to the UK.
All of a sudden everybody wants a piece of the cake.
Double Taxation Treaty
Hopefully, there will be a double-taxation treaty between countries to avoid you being taxed multiple times. The following countries have a double taxation agreement with the UK in place:
- Republic of Ireland
- South Africa
- USA
- Netherlands
- Sweden
- Switzerland
And then the following countries have an alternative in place:
- France
- Italy
- India
- Pakistan
If there is no Tax Treaty or alternative in place you may be able to get relief under Unilateral Relief provisions.
The bottom line is if you have an estate that’s worth more than £325,000 that you want to pass on to somebody other than your spouse, civil partner, a charity or community amateur sports club, it would be wise to seek professional help.
That’s going to cover the domicile meaning for most people but if it hasn’t I have included some frequently asked questions at the end of this article.
But before I move on to that, there’s another type of domicile that British expats should be aware of.
Exchange Traded Funds
I often talk about investing in Exchange Traded Funds (ETFs) on this site. That’s because other types of funds such as standard index funds or OEICS are often restricted to UK residents only, so British expats can’t get access to them.
EFTs on the other hand, are usually available to expats through online brokerages, so they make a convenient investment option.
And it turns out that like people, ETFs also have a domicile and this can have an impact on our bank balance.
Most European ETFs are domiciled in either Ireland or Luxembourg and by European ETFs I’m talking about ETFs domiciled in Europe, rather than ETFs that just contain European shares.
Most experts these days recommend investing in a globally diversified portfolio of stocks and bonds and it makes sense, but there is one drawback and it relates to the US.
The US has the largest stock market in the world, so many if not all of these global index funds will contain a lot of US shares. In fact, most of them will contain over 50% US shares. (You can read why here.)
Where tax and domicile become important for ETFs with US shares is in regard to dividend tax. Basically, US dividends are liable for tax twice. They are liable for tax when you receive them as income and they are liable for tax at source i.e. in the US through withholding tax.
How much tax is applied depends on where your ETF is domiciled. That’s because some countries have tax treaties with the US.
Take Ireland for example. It has a double-taxation treaty with the US which allows most Irish domiciled ETFs to receive dividends from US companies after a 15% deduction for withholding tax.
But ETFs domiciled in other countries often have more taken. Dividends from ETFs domiciled in France, Luxembourg and the US may be subject to a withholding tax of 30% for example.
In some cases it may be possible to claim some of this back, in others it may not.
I’ve heard the argument that it is still worth investing in US ETFs directly as they have lower ongoing charge figures, so the withholding tax is negated by the savings you make on your ongoing charges and while there may be some truth in this, I think the savings are going to be negligible and this also ignores US inheritance tax.
US Estate Tax Laws
If you purchase US ETFs from a US exchange you may be liable to pay U.S. estate taxes, whether you are American or not. The really bad news is that if you’re not American the starting balance for which this tax kicks in is much lower.
No matter where you are from, an expat with holdings of over $60,000 in US ETFs may come under US estate tax law. Whoever you leave your money to could be taxed between 18 and 40% on US shares (including shares held in funds such as ETFs).
Because of this Irish domiciled ETFs bought off non-US stock exchanges are probably a better choice for most British Expats.
The website or documentation for the fund that you invest in should say where it is domiciled. Alternatively, you can check the ISIN number, which all ETFs have.
An ISIN beginning with IE is a fund domiciled in Ireland.
Take Vanguard FTSE All-World UCITS ETF for example. It has the following ISIN number:
ISIN: IE00B3RBWM25
Frequently Asked Questions
Who decides what your domicile is?
In the UK the only way you can determine your domicile formally is through a court of law.
Where am I domiciled?
Most people’s domicile is straight forward. It is the country where they are born.
If you live in Britain and were born in Britain and your parents were born in and live in Britain your domicile is almost certainly going to be Britain.
However, when people start living in different countries for extended periods of time, which country they are domiciled within can become more a little more complicated.
To help answer this question for them it is worth taking a look at the three kinds of domicile – domicile of origin, domicile of dependence and domicile of choice.
Domicile of Origin
You usually receive your domicile when you are born. In most circumstances this domicile will be the same as your father at the time when you are born.
For example, if your father was living and working in the UK, but you were born outside the UK while your parents were on holiday, your domicile would still be the UK.
If your parents weren’t married when you were born you would take your mother’s domicile. If she was domiciled in Britain then you would be too.
Your domicile of origin isn’t easy to change. In fact, it only changes if you get a new domicile of choice.
Generally, a foreigner who comes to Britain won’t be considered domiciled in Britain until they have lived there for 15 years.
Domicile of Dependence
Until you are 16 years old, you are legally dependent on an adult. Your domicile will be the same as the adult you legally depend upon.
Domicile of Choice
In some circumstances you can get a new domicile, called a domicile of choice. You can only get get a new domicile (of choice) once you reach 16 years old. This domicile of choice must meet the following conditions:
- You need to be able to demonstrate that you are permanently settled in your new country of domicile
- You need to be able to demonstrate that you plan to remain in your new country of domicile for the rest of your life
You are not required to sever ties with your domicile of origin. For example, you don’t necessarily have to be a passport holder or citizen of your new domicile of choice country, but these kind of things will be considered when it comes to things like taxes.
Generally, if you wanted a new domicile of choice you would need to provide evidence of your intention to remain in your new country permanently.
The kinds of things that are taken as evidence are your:
- permanent place of residence
- work or business
- social commitments
- family commitments
Generally, it should be pretty self evident, but in some circumstances it may not be.
When does domicile become important?
For most people domicile usually only becomes important for two reasons:
- Large amounts of taxes are at stake.
- Inheritance tax
Deemed domicile
Deemed domicile is where you are treated as domiciled in a country for all tax purposes, even if you are not (You can read more about this here).
The Bottom Line
Your domicile is usually going to be the place where you were born, so for British Expats, that is going to be Britain.
Unless you specifically make a concerted effort to change your domicile you will keep it, no matter where you move to.
Domicile is not the same as residence. Domicile is usually where you were born, and residence is usually where you live.
For most people, their domicile only usually becomes an issue if large amounts of tax are at stake or for inheritance tax. If you think this applies to you, then it would be wise to seek professional help.
Investors should also be aware of the domicile of their ETFs. Irish domiciled ETFs bought from a non-US exchange may make sense for British Expat Investors.