The ins and outs of domicile and why it matters

Newsflash – tax domicile is the new “news”…

I suspect that all UK taxpayers, will have recently been interested to learn about how an individual’s domicile position, can significantly affect how much tax they pay in the UK. I am of course. referring to the headline news generated about Rishi Sunak’s wife Akshata Murthy, after she confirmed she has been claiming non UK domicile tax status, allowing her to shelter some or all of her overseas income and gains from the UK tax charge.

This is a completely legal and commonly used method of UK tax mitigation, by those who are tax resident, but not domiciled in the UK.

Back to Tax Basics – so when are you taxed in the UK?

The extent to which an individual is subject to UK tax on income and gains, depends on two things:

• Tax Residence – largely determined by days of presence in the UK, and
• Domicile – Domicile is a concept of common law and based on fact and intention. Domicile is also a key factor in assessing the extent of liability to UK Inheritance tax (IHT)

UK Tax residence results in tax becoming due on worldwide income and gains generated as it arises. This is the case no matter where the sources are situated and is, in effect, the default position.

However, UK Resident, non UK domiciled taxpayers, can instead choose to claim the remittance basis (RB) of taxation. This potentially allows their overseas income and gains that remain outside the UK to be ringfenced and protected against the UK tax charge. This RB of tax assessment, must be formally claimed via the UK self-assessment tax return. In summary, it allows those who qualify, to effectively limit their UK tax liability to sources of income and gains that are actually paid to the UK, or somehow used or enjoyed here.

The RB election is free from any charge for the first 7 years of tax residence, but thereafter individuals must pay £30,000 per tax year to continue access this favourable tax treatment. This increases to £60,000 when an individual has been resident for 12 of the previous 14 tax years. Once 15 years of residence out of the previous 20 tax years is reached, they will automatically be deemed domicile in the UK and pay UK income tax on worldwide income and gains.

What’s the catch?

Where the remittance basis is claimed, the individual will lose their entitlement to the UK personal allowance (£12,570) and capital gains annual exemption (£12,300). It follows that for those with modest overseas income, it is perhaps worth seeking professional advice, to then undertake comparison tax calculations. This will confirm the most tax efficient method of tax assessment to be claimed each year.

So how is Domicile determined?

There are three different types of domicile:

• Domicile of Origin – usually inherited from the father’s domicile
• Domicile of Choice – acquired when there is a permanent or indefinite intention to settle in a new jurisdiction
• Domicile of Dependency – following the domicile of parents up to the age of 16

It is possible to change your domicile, however in practice it is difficult to shake off UK Domicile of Origin. This requires relinquishing all ties with the UK and demonstrating clear evidence of an intention to settle and stay “for ever” in another country. HMRC and the courts, will look for robust facts connected to background circumstances, such as finances, family ties, career choices, quality of residence, location and ownership of houses, citizenship in the new country, medical treatment and languages spoken. These details are only some of the aspects that the courts would review closely in the event of any challenge by HMRC. The burden of proof ultimately rests with the person involved and connected case law is complex and substantial.

It’s important to note that a lost domicile of origin in the UK, can very easily be reacquired. For example, where an individual who was born in the UK and had a UK domicile of origin, relocates permanently overseas and acquires a domicile of choice in another jurisdiction, then returns to the UK for just one tax year of residence, they would reacquire their original domicile of origin in the UK.

We would always recommend that professional tax advice is taken should you be unsure of your domicile status for tax purposes in the UK.

If you would like further information on the remittance basis or non UK domicile tax aspects, please do get in touch with either Lynn Gracie, Carol Edwards, or any member of our Private Client International Tax team.