Why is your domicile so important?

In this article we explain why is your domicile so essential, and what are the implications with regards to taxation?

When the tax status of Chancellor of the Exchequer Rishi Sunak’s wife was leaked to the press, few could have predicted the political fallout. At the time, Akshata Murthy had a non-domicile tax status in the UK, paying tax on her UK earnings to the Treasury and tax on her overseas earnings to the Indian government. So, why is your domicile so essential, and what are the implications with regards to taxation?

What does the term domicile mean?

Before we look at this in more detail, it is important to remember the term domicile. It relates to:-

“The country that a person treats as their permanent home, lives in and has a substantial connection with”

In the case of Akshata Murthy, she cannot obtain British citizenship without renouncing her Indian citizenship. Consequently, she has a non-domicile tax status in the UK, which is perfectly legal and means she only pays UK tax on her UK income and gains. On the other hand, a person domiciled in the UK will pay tax (capital gains, income and inheritance tax) on their UK and worldwide income and gains.

There are four different types of domicile

Many people may be unaware, but there are three main types of domicile and one deemed status, which are:-

  • Domicile of origin
  • Domicile of dependence
  • Domicile of choice
  • Deemed domicile

Interestingly, there is no formal application process for any particular domicile status. However, if you are required to submit a tax return, you will need to complete a Self Assessment SA109 form. This will identify the terms on which you are claiming a particular domicile, although it can be challenged and reviewed by HMRC.

Domicile of origin

Upon birth, all of us will acquire a domicile of origin, usually that of our father, mother, or adopted parents. Consequently, your domicile could very well be different from your country of birth.

It is important to note that your domicile of origin is retained permanently unless replaced by a domicile of dependence or domicile of choice. If you acquire a domicile of choice, and this was to cease, you would automatically revert back to your domicile of origin.

Domicile of dependence

The term domicile of dependence relates to children under 16 (lower age limit in Scotland). This ensures that their domicile is reflective of their parents/legal guardians – the people they are legally dependent upon. Consequently, if the person a child was legally dependent on were to change their domicile status, the child’s status would automatically change as well.

Domicile of choice

As the term suggests, a domicile of choice relates to the individual’s preference. There are certain conditions when looking to apply a domicile of choice, which include:-

  • Permanent settlement in the country which you now recognise as your domicile
  • You intend to stay there for the rest of your life
  • Ties have been broken with your domicile of origin

While strictly speaking, there is no requirement to become a UK citizen or acquire a UK passport; this would be looked on favourably with a domicile of choice application. In essence, a domicile of choice application reflects a commitment to a particular country.

Other factors to be taken into consideration when applying a domicile of choice include:-

  • Retirement plans
  • Business activities
  • Social commitments
  • Family ties

While looking to apply a domicile of choice is relatively straightforward, for many people, it can be a big decision to cut ties with their “home” country.

One of the most famous cases of a domicile of choice was that of John Lennon and his bid to become a permanent resident of the US, living in New York. Despite his historical connection with the UK, his decision to cut ties with his former homeland allowed him to apply this domicile of choice.

Deemed domicile

In April 2017, the UK government brought in a raft of regulations concerning the domicile status of individuals living in the UK. While the three main options remain relatively unchanged, an additional category was introduced in the shape of “deemed domicile”. This allows HMRC to treat those not officially domiciled in the UK, as if they were, for income and capital gains tax purposes.

There are two specific scenarios where the deemed domicile status can be used, which include:-

  • Individuals domiciled outside of the UK but born in the UK, with a UK domicile of origin
  • Those who have been resident in the UK for tax purposes for at least 15 of the last 20 tax years

If you have significant assets and receive substantial income from overseas, the deemed domicile status could prove expensive. It is vital to take advice from your accountant!

What is non-domicile status?

Often referred to as non-dom, this relates to the status of an individual and their obligations to pay UK taxes. It implies that the UK is not their permanent place of residence and infers that they will return to their country of origin at some point in the future. Therefore, those with non-domicile status will only pay UK tax on their UK earnings.

To say that non-dom status is controversial is something of an understatement. Many see it as a means of switching tax obligations on overseas income to countries with a lower tax rate than the UK. While this reading is not necessarily correct, this is an angle that has been the subject of much media coverage.

How does non-domicile status work?

Those with a UK non-domicile status will not pay tax on foreign income of less than £2000 a year brought into the UK. This is often referred to as unremitted foreign income. However, if you decide to bring more than £2000 a year of foreign income into the UK, you have two stark choices:-

Opt to pay tax on worldwide income

If you decided to pay tax on income and gains from non-UK sources, this would be added to your UK income and taxed accordingly. However, you would be eligible for the various tax allowances and offsets in this scenario.

Remittance basis

Alternatively, if you have significant wealth overseas but wish to transfer more than £2000 a year to the UK, you can opt for a remittance basis. This means that only the income/gains transferred to the UK will be added to your income and taxed accordingly. The element of your income and gains which remain overseas is untaxed. However, you may be required to pay an annual charge, dependent upon how long you have been living in the UK.

The scale for the annual charge is as follows:-

  • £30,000 if you have lived in the UK at least seven out of the previous nine tax years
  • £60,000 if you have lived in the UK for at least 12 of the last 14 tax years

If you have lived in the UK for 15 of the last 20 tax years, you will not be eligible to claim non-dom status. Consequently, you must pay UK tax on all of your international income and gains.

Why is there a non-domicile status?

There is no doubt that the non-dom status used by many wealthy individuals is controversial, although perhaps not fully understood. Whether paying VAT or other taxes on goods, products and services or employing people in their private or business lives, non-doms can directly and indirectly provide additional income for HMRC.

Whether the potential benefits of allowing non-doms to operating businesses in the UK are sufficient to offset the tax breaks, has been, and continues to be, a subject of controversy.

Summary

While 2015 and 2017 saw a tightening of the non-domicile rules and regulations, it is still a potentially lucrative means of reducing tax for wealthy individuals living in the UK. It is also important to note that many of those caught up in the non-dom scenario may have inherited or created businesses in their domicile of origin. Consequently, it could be argued that converting to a full UK resident taxpayer could see HMRC benefit from actions carried out previously in a different country. This is not a straightforward subject!

Sources:-

https://www.cityam.com/sunak-considered-resigning-over-his-wifes-non-domicile-tax-status/
https://www.ft.com/content/fb958a86-9564-4149-a423-8f2570d8566a
https://www.google.com/search?client=firefox-b-d&q=domicle
https://www.litrg.org.uk/tax-guides/migrants/residence-and-domicile/where-am-i-domiciled
https://www.gov.uk/government/publications/self-assessment-residence-remittance-basis-etc-sa109
https://www.theguardian.com/politics/2022/apr/07/what-is-non-domicile-status-and-who-qualifies-hmrc
https://www.city.ac.uk/news-and-events/news/2022/04/what-is-a-non-dom-an-expert-answers-questions-about-the-tax-status-claimed-by-rishi-sunaks-wife-and-other-wealthy-people
https://inews.co.uk/inews-lifestyle/money/non-dom-status-what-rules-how-long-domicile-stay-uk-who-apply-akshata-murty-1564081
https://www.gov.uk/guidance/remittance-basis-changes
https://www.youtube.com/watch?v=c9hgQXPgYJQ

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