Correctly establishing your ‘domicile’ can have a big impact on your UK tax bill, especially if you have foreign income, foreign capital gains or a potential exposure to Inheritance Tax (IHT).
Domicile is a complex issue because it is not actually defined in our tax laws; it is a legal concept as to which country’s rules an individual is to be subject to, in terms of factors like marriage, divorce and inheritance/intestacy rules. Your domicile can be different from both your nationality/citizenship and residency.
Domicile of origin
Everyone has a domicile and you can only have one domicile at a time. The starting point is to look at your “domicile of origin” which you acquire at birth. This is usually your father’s domicile, but in cases where your parents were not married at the time of your birth, you will take on your mother’s domicile. It is therefore important to find out as much as possible about your family background and whether your parents had or have any overseas connections. Domicile can be a major consideration if you are making a disclosure to HM Revenue and Customs (HMRC) of previously undeclared offshore income/ gains, such as under the Liechtenstein Disclosure Facility. Your domicile status may never have previously been looked at and, more importantly, no claim may ever have been submitted to HMRC.
Domicile of dependence
Changes to your domicile status can happen through changes in your parents’ domiciles whilst you are a child (under 16), through marriage (before 1974) or if your intentions change.
Domicile of choice
If you have a non-UK domicile of origin, then in order to acquire a UK domicile as an adult, you must have both:
- a physical presence in the UK and
- an intention to remain here indefinitely, but not necessarily permanently.
Income tax and capital gains tax
An individual who is both UK tax resident and UK domiciled is subject to tax on their worldwide income and capital gains on the arising basis. This means they are taxed on the income/gains as and when they receive them.
For individuals who are UK resident but non-domiciled, they can choose whether to use the arising basis or whether to use the remittance basis for their non-UK income/gains. The remittance basis permits them to only pay tax in the UK on their overseas income/gains when the funds are “remitted” or brought in to the UK. There is a wide definition of what constitutes a remittance and tracking remittances does need careful attention, so specialist advice should always be sought.
Individuals who have been long-term residents of the UK (for at least seven tax years from the past nine) are subject to an annual charge of at least £30,000 if they wish to continue to use the remittance basis; they can of course choose to switch to the arising basis if it is not worth paying the charge.
The other primary consideration of being non-domiciled relates to Inheritance Tax. Most people will be aware that IHT is charged on the value of possessions owned at the date of death which cumulatively exceed the threshold of £325,000. However, it can also apply to gifts made during a person’s lifetime, especially if the gifts were made in the seven years prior to the date of death.
A UK domiciled individual is liable to IHT on their worldwide assets, whereas a non-domiciled individual only pays IHT on their UK-based assets.
If you have been UK resident for at least 17 tax years, you will be deemed to be UK domiciled although this rule only applies for IHT purposes and there are some countries to which this rule cannot apply.
Until 5 April 2013, there was an IHT lifetime limit of £55,000 on the amounts that could pass from a domiciled spouse to a non-domiciled spouse. As of 6 April 2013, there are elections which can be made to mitigate this issue.
Further information can be obtained from the HMRC website using the link below:
Author: Katherine Ford, Tax Consultant on the ReSource Tax and VAT Consultancy Team.