The tax position of non-UK domiciled UK resident individuals (referred to as non-doms) has been making headlines over recent months and it can be a complex, and often misunderstood, area of tax.
Our latest blog is a high-level introduction to the tax treatment of non-doms and the difference between residence and domicile for tax purposes.
What is the difference between domicile and residency status?
Residence and domicile are often wrongly assumed to mean the same thing, however, the two have different meanings under UK law and there can be serious tax consequences if they are confused.
Domicile is broadly a person’s ‘long term or permanent home’. There are three types of domicile status under common law:
- Domicile of origin – you acquire a domicile of origin at birth. This is usually the same as the domicile of your father (unless your parents are not married, then you take the domicile of your mother).
- Domicile of dependence – before the age of 16, if your father (or mother) changes domicile, your domicile will also change.
- Domicile of choice – after 16, it may be possible to change your domicile of origin and choose a new domicile (although it is not simply a case of ‘choosing’ a new domicile – you have to live permanently in the jurisdiction and there has to be a genuine intention to remain there indefinitely or ultimately return there).
In addition, the UK tax code introduces the concept of deemed domicile status. This is a definition which is relevant for tax purposes only. The effect of an individual having deemed domicile status is to treat an individual who is otherwise a non-dom as if they were domiciled for inheritance tax (IHT), income tax and capital gains tax (CGT) purposes.
Once deemed domicile status is established, many of the advantages that non-doms can benefit from may fall away (although it may be possible to lose deemed domicile status after a subsequent period of non-UK residence).
Residence is distinctly different from domicile. It has less of a permanence and broadly stems from where you spend most of your time, i.e., where you live from time to time.
It is much easier to change residence for tax purposes than it is to change domicile.
To determine your UK tax residence position, you will need to apply the terms of the Statutory Residence Test (SRT). The SRT is complicated, and advice should always be sought where an individual is uncertain of their tax residence status.
The tax treatment of non-UK residents and non-doms
Ordinarily, a UK resident individual who is also domiciled in the UK is subject to UK income tax on their worldwide income and UK CGT on their worldwide capital gains (the so called arising basis).
UK resident individuals who are non-doms may receive preferential tax treatment as they may be able to elect to be taxed on the remittance basis of tax, rather than on the arising basis.
This means that they will only taxed in the UK on monies they bring, or remit here, to the extent that what is brought here is income or capital in nature.
A remittance is not just bringing cash to the UK, it could be having use of an asset in the UK which has been purchased using funds from overseas, or use of an asset that is brought into the UK. The definition of a ‘remittance’ is wide – specialist advice should always be sought.
Before choosing to apply for the remittance basis, it’s important to consider the following:
- if you are a UK non-dom, the remittance basis applies automatically to those who have unremitted foreign income or gains of less than £2000 in a tax year
- by submitting a claim on a remittance, you lose your personal allowance for income tax and the annual exemption amount for CGT (there are a number of double tax agreements that override this, but the number of countries concerned is limited)
- if you are a UK non-dom and have been resident in the UK for at least seven out of the previous nine tax years, you will have to pay a £30,000 annual charge (the remittance basis charge) if you claim the remittance basis. This increases to £60,000 after 12 years of residence.
There is therefore a cost to claiming the remittance basis and this should be weighed up against the tax benefits. For many, it will be a price worth paying.
Get in touch
Residency and domicile status can be very complex areas of personal tax. Rules can change over time, so we would always recommend speaking to an experienced tax adviser to ensure you are making the right decisions for your situation. Get in touch by speaking to your usual PM+M adviser or emailing firstname.lastname@example.org.