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Expats in Cyprus, tax advantages and domicile

Expats have been misled into believing that if buy a property in Cyprus and retire to the island, they will not be liable for UK Inheritance Tax.

IF YOU are retiring to Cyprus and have been told that one of the tax advantages of buying  property on the island is that you will not have to pay Inheritance Tax, it is essential that you check with HM Customs and Excise for advice on your domicile position. Note that:

  • If you are domiciled in Cyprus there is no UK Inheritance Tax to pay on your estate.
  • If you are British it is unlikely you will have changed domicile – in that case your worldwide estate (including property in Cyprus) will be subject to UK inheritance tax.

Please bear in mind that Domicile does not mean Resident. If you are originally British, or had long term connections in the UK it is very possible you are still UK domiciled.

HM Revenue & Customs booklet ‘HMRC6 Residents and non-residents – Liability to tax in the United Kingdom‘ provides guidance for those who need to consider their domicile for Capital Gains Tax purposes.

Domicile

FOR income tax and capital gains tax purposes, whether or not you are domiciled in the UK is relevant only if you have foreign income and/or gains during a tax year. If you do not have foreign income and/or gains then your domicile status has no bearing on your UK income tax or capital gains tax position and you do not need to consider it.

The guidance we provide here will help you, when your affairs are straightforward, reach a decision on your domicile status. If your affairs are more complex we direct you to where you can obtain further guidance and we also recommend that you speak to us or seek advice from a professional tax adviser.

The fact that you were born in the UK, have lived for most of your life or are now living permanently here is a good indication that you might be domiciled in the UK but it is a complicated, legal issue and you might want to seek professional advice if you are unsure about your domicile status.

If you do have foreign income and/or gains then your domicile might have a bearing on what UK tax you pay on those foreign income and/or gains. If you are resident but are not domiciled in the UK, although you will still have to pay UK tax on any income and/or gains which arise or accrue here, you might wish to claim the remittance basis of taxation for your foreign income and/or gains.

We are unlikely to challenge any person who says they have a UK domicile. But if you say that you have a non-UK domicile, then especially if you were born in the UK, we might want to enquire whether or not that is correct. By its very nature, this sort of enquiry aimed at establishing your domicile, will be an in-depth examination of your background, lifestyle and intentions over the course of your lifetime. Any enquiry of this sort will extend to areas of your life, and that of your family, that you might not normally think are relevant to your UK tax affairs. We will need to ask these questions and sometimes ask you to provide us with information as part of an enquiry into your domicile status.

What does domicile mean?

Domicile is a matter of general law; not a tax law. There are many things which affect your domicile. Some of the main points you should consider if you are claiming not to be domiciled in the UK are:

  • you cannot be without a domicile
  • you can only have one domicile at a time
  • you are normally domiciled in the country where you have your permanent home
  • your existing domicile will continue until you can acquire a new one
  • domicile is distinct from nationality or residence, although both can have an impact on your domicile
  • the fact that you register and vote as an overseas elector is not normally taken into account when deciding whether or not you are domiciled in the UK.

Any references we make to being ‘domiciled in the UK’ are references to being domiciled in any part of the UK.

What types of domicile are there?

There are three types of domicile relevant to Income Tax and Capital Gains Tax. These are:

  • domicile of origin
  • domicile of choice
  • domicile of dependence.

Domicile of Origin

You normally acquire a domicile of origin from your father when you are born (see also ‘domicile of dependence’). It need not be the country in which you were born – for example you might have been born in a country which was not the country in which your father was domiciled at the time of your birth. A domicile of origin may change as a result of adoption and is not easy to displace although this does occur. If you leave the country of your domicile of origin, you will continue to be domiciled there until you acquire a domicile of choice elsewhere.

The fact that you were born in the UK does not automatically mean that you are domiciled here. You might have been born in the UK to a non-UK domiciled father and then moved to another non-UK country. Regardless of the fact that you were born in the UK, your domicile of origin would be the same as your father – non-UK. If you return to the UK and are not planning to remain here permanently, then you will continue to be domiciled outside the UK.

If your parents were not married at the time of your birth, you would acquire your domicile of origin from your mother.

Example: domicile of origin

If you were born in the UK and your father was a non UK domiciled soldier of a foreign nation serving in the UK. Your domicile of origin would be the same as your father – non UK and in the place your father was domiciled.

but

If your non UK domiciled father dies when you are a child and you are adopted by a UK domiciled father. Your domicile of origin will change to a UK domicile as a result of your adoption. Your original domicile has been ‘displaced’.

Domicile of Choice

You have a legal capacity to acquire a new domicile at the age of 16. Broadly, to acquire a domicile of choice you must leave your current country of domicile and settle in another country. You need to provide strong evidence that you intend to live there permanently or indefinitely. The following factors will be relevant, though this list is not exhaustive:

  • your intentions
  • your permanent residence
  • your business interests
  • your social and family interests
  • your ownership of property
  • the form of any Will you have made.

Example: domicile of choice

If you were born in the UK and your father was a non UK domiciled person working in the UK while you were a child you would have the same non UK domicile as your father.

but

You were brought up, educated and start work in the UK. When you are 21 your father retires from his job and decides to return to his country of domicile. You have bought a home and married and you have made the UK your permanent home which you do not intend to leave. You will not be joining your father abroad for anything other than an occasional visit. By deciding to stay in the UK permanently or indefinitely you have established a domicile of choice in the UK.

Domicile of Dependence

Until you have the legal capacity to change it, your domicile will follow that of the person on whom you are legally dependent. If the domicile of that person changes, you will automatically acquire the same domicile, in place of your domicile of origin. Before 1974, married women automatically acquired their husband’s domicile. As a married woman, who married before 1974, you would retain your husband’s domicile until you legally acquire a new domicile. But, if you are a woman who married on or after 1 January 1974, your domicile is not necessarily the same as your husband’s. Your domicile will be decided in the same way as any other individual who is able to have an independent domicile.

An exception to this is the Double Taxation Agreement between the UK and the USA, which provides that a marriage before 1974 between a woman who is a US national and a man domiciled within the UK is deemed to have taken place on 1 January 1974.

Example: domicile of dependence

You are a woman with a domicile of origin outside the UK who married a man domiciled within the UK in January 1970. Upon marriage you became UK domiciled – your ‘domicile of dependence’ being the same as your husbands domicile.

As from 1 January 1974 you can acquire an independent domicile of choice, which could be different from your husbands domicile.

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