The concept of domicile is currently a hot topic. Our head of tax, Sarah Woodall looks at the law and summarises the opportunities to mitigate tax within the law for those not domiciled in the UK. Sarah goes on to explain the concept of residence here.
Domicile and tax on foreign income
UK residents are liable to UK income tax on the whole of their worldwide income. For those not domiciled in the UK there are significant potential tax advantages.
An individual resident in the UK but not domiciled here can choose their foreign income and capital gains to be chargeable to UK tax on a remittance basis, for up to 15 years. This means that only income or gains brought into or enjoyed in the UK become liable to tax in the UK, subject to the payment of a potential remittance charge.
The earnings of an individual resident in the UK, but non-domiciled here, is chargeable to income tax wherever earned or received, whether in respect of that year or an earlier year and whether or not an employment is held at the time the earnings are received. They are taxable only on the earnings in respect of duties performed in the UK.
An individual cannot be without a domicile. Domicile is not defined for tax purposes but broadly is an individual’s permanent home, and the place where he or she has their closest ties and ultimately plans to return. There are different types of domicile including:
- domicile of origin: a person’s domicile at birth which sticks or is retained, unless displaced by domicile of choice
- domicile of choice: acquired by satisfying two tests:
- physical residence in the chosen territory
- an intention of permanent or indefinite residence in that territory. HMRC requires positive proof of this.
(Both elements must be present, or domicile of choice is not acquired.)
This all matters. For example, for individuals leaving the UK to live elsewhere then only if they can prove to HMRC’s satisfaction that they have an intention to reside outside the UK indefinitely would HMRC agree they acquired a foreign domicile of choice on departure.
An example of an advantage of non-UK domicile is where an employee resident in the UK is not domiciled in the UK and an employment is with a foreign employer, their earnings may be taxed on the remittance basis. This means only income enjoyed or brought to the UK is taxed in the UK. Remittances of earnings are assessed on a current year basis.
Essentially, those taxable on the remittance basis are subject to UK income tax on their:
- UK source income, on an arising basis
- foreign source income, only to the extent that they remit it to the UK
- expressed generally, inheritance tax (IHT) is chargeable on all property within the UK regardless of domicile, and on worldwide property which is beneficially owned by an individual domiciled in the UK. Expressed simply, – no UK domicile, no IHT on wider worldwide property.
For inheritance tax purposes, excluded property is not chargeable to inheritance tax and this includes property situated outside the UK, if an individual beneficially entitled to it is domiciled outside the UK.
For earnings to be chargeable on a remittance basis, it is necessary to demonstrate the:
- duties of the office are performed outside the UK
- employment is with a foreign employer
- individual is not domiciled in the UK.
Whilst many individuals can meet these criteria in respect of overseas employment, and for that reason their earnings may be eligible to be taxed on remittance basis, the remittance basis charge may mean this is not financially worthwhile.
Remittance Basis Charge
Reforms that took place in Finance Act 2017 introduce the concept of deemed domicile for income tax and capital gains tax. This means that from 6 April 2017, non-UK domiciled individuals resident in the UK for 15 of the last 20 years are deemed UK domiciled for income tax and capital gains tax purposes. Additionally, UK resident but non-domiciled individuals born in the UK (and so born with a UK domicile of origin), are deemed domiciled in the UK whenever they are UK resident, with a one-year period of flexibility for IHT purposes.
Even if a taxpayer is non-domiciled, if they are resident in the UK in seven or more of the last nine tax years, they must pay the remittance basis charge if they wish to be taxed on remittance basis. This charge is not optional.
The scale of the remittance charge payable is not influenced by the wealth of an individual, only their length of stay in the UK. In particular, the charge is
- £30,000 for individuals UK resident in seven or more of the last nine tax years
- £60,000 for individuals UK resident in 12 or more of the last 14 tax years
- once an individual has been UK resident in at least 15 out of the last 20 tax years, they can no longer claim the remittance basis. If they are resident in the UK, then they pay tax in the UK on their income worldwide. They do not pay the remittance basis charge.
Residence is determined by statutory tests – more detail is available here.
