A few months ago we published a case study concerning HMRC enquiring about foreign income. This can happen if you are a foreign national and are now living and working in the UK. An area we didn’t touch on was associated with how HMRC views your domiciliary status. The recent news about Rishi Sunak’s wife has highlighted this is somewhat complex and often misunderstood area of tax law. In this short post we’d like to help explain what it means to be ‘domiciled’ or ‘non-domiciled’ where tax in the UK is concerned.
What does ‘domicile’ mean?
In a nutshell, ‘domicile’ refers to that country a person treats as their main or permanent home. Also, it concerns where they actually live and maintain a ‘substantial’ connection with.
If you read our article on “Living Overseas – Do I Need Top Pay Tax if I Leave The UK?”, then you’ll be familiar with the tests that HMRC apply to decide how to treat your current tax residency status. As part of the Automatic UK Test, HMRC looks at your sufficient ties to the UK and whether they point to whether or not you’ve actually left the UK or still have reasons to come back, perhaps regularly. These tests help HMRC determine if you are legitimately living overseas for tax purposes or if perhaps you’re trying to avoid paying UK taxes by staying out of the country for 183 days a year.
Domicile of origin and domicile of choice.
Where UK tax law is concerned, there are three types of domicile – domicile of origin, domicile of choice and domicile of dependence. In the UK, you acquire domicile or origin at birth through your father, although this doesn’t mean the country the person was born in, but most often does. So, if your father is from India, India is your domicile, unless you choose otherwise.
Domicile is different to residency. In UK common law, every individual has one domicile, you can’t have two or have no domicile.
Your domicile of origin cannot be lost easily. Simply by moving overseas for an extended period, becoming a tax resident here or elsewhere, does not automatically remove for domicile status.
However, domicile of choice is a little harder to consider. Take for instance, a UK national. If they move abroad ‘permanently’ to settle in another country. Permanent means ‘indefinitely as it is really up to the person concerned, as is domicile of choice. It comes down to intention’s: if the new country will be their permanent residence, will they have family interests there, a business or other social interests. Do they own a property in that country? And, what about the existence of a Will and where that was created.
It’s quite a tricky area, as there are many variables and many ways to interpret somebody’s intentions. Hence, arguments with HMRC can arise and as always, you’ll need to prove your ‘innocence’ in the matter.
Domicile of dependence is for children under the age of 16 and their domicile will follow that of the person on whom they are legally dependent. However, it must be noted that if the domicile of the parent or legal guardian changes, the child will automatically acquire the same domicile and the child’s domicile of origin will be displaced.
[Read more about what happens if HMRC make enquires about you overseas income]
Important tax issues to consider
It is quite understandable why somebody would not wish to give up their domiciliary, as there may be intentions to return home, the UK being transitory, even though it may appear as somebody’s permanent home.
Take for instance somebody from India who has been living and working in the UK for many years. Their family may still predominantly be in India. They may’ve family business interests there too, or even own property there. In short, there may still be clear intent to return one day.
This means that although a foreign national living and working in the UK maybe a ‘tax resident’ and pay taxes on the income generated through their work here, their ‘non-domicile’ status will mean that their worldwide income does not have to be reported in the UK, as that will no doubt be payable to the tax authorities in the domiciled country. This highlights two options for non-domicile tax residents – being taxed on an arising or remittance basis
Taxed on an ‘arising’ or ‘remittance’ basis
If you are ordinarily considered as UK domiciled and a tax resident, then you are charged on an arising basis. This means that you pay tax on your worldwide income and you’re allowed to use your personal tax allowances and any annual exemptions to offset that income.
However, things are little different and often highly beneficial if you are considered ‘non-domiciled’ while a tax resident in the UK. In this case, you can choose to be taxed on a remittance basis, if that treatment is more favourable than the arising basis. By choosing the remittance basis, you’ll only be taxed on UK sourced income, not worldwide income, unless you decide to ‘remit’ that income. For instance, if you’re a Singapore domiciled national living and working in the UK as a tax resident and a retirement or an assurance policy matures yielding a gain. If you leave the gain in Singapore, no tax is due. If you bring that money into the UK – remit it, then tax falls due.
It’s important to note though that if you choose the remittance basis, you’ll lose your tax allowances and exemptions.
Other factors to consider when using the remittance basis
Do I need to claim to use the remittance basis?
Not necessarily. If your ‘unremitted’ foreign income and gains for the tax year are less than £2000, the remittance basis applies automatically, so you don’t need to claim. Also, it should be noted that at this level, you won’t lose your personal allowance or capital gains annual exemption either. This also allies, even if you are considered ‘domiciled’ for UK tax purposes.
If I choose to remit my income, how will it be taxed?
If you decide to bring some of the income you have earned overseas into the UK, that income will be taxed at the standard (non-savings) tax rates – 20% for basic rate earners, 40% for higher rate payers and 45% for the top tier incomes over £150,000.
Note though that dividend income, where you’d normally see these taxed at 8.75%, 33.75% and 39.35%, will be taxed as ordinary income – which would not be the case if you’d decided to opt for the ‘arising’ basis as opposed to ‘remittance’ basis.
How does the remittance basis work if I am a long term resident?
As the saying goes – “there’s no such thing as a free lunch”. At some point, HMRC will see your long term residency in the UK as a way of reducing your tax exposure and will look to make you pay for that entitlement. So, two bands of charges apply:
Resident for 7 out of the previous 9 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £30,000 per year.
Resident for 12 out of the previous 14 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £60,000 per year.
This is HMRC’s way of encouraging people to convert to the ‘arising’ basis.
When am I automatically considered domiciled in the UK?
If you have been resident in the UK for 15 out of the previous 20 years, you are deemed as domiciled for tax purposes.
Domiciliary status for tax purposes is a complicated area, seek help
We have presented in rather simple terms the most commonly encountered tax aspects of being domiciled or non-domiciled in the UK. This subject is very complicated as the range of income sources can be extensive as can your ties to the UK if you are non-domiciled. Inheritance tax is another area affected by domiciled status that we haven’t covered here. Rules covering IHT and domiciled status changed in 2017.
If you are encountering issues with taxation as applied to domicile status, it’s likely that you require specialist tax assistance. We’re based in London and our offices are conveniently located in Richmond-Upon-Thames, Putney and Cavendish Square. Our tax advisers are on-hand to help you navigate these difficult waters and arrive at an outcome best suited to your personal circumstances. Call 020 8108 0090 or use connect using the form here.