There are three kinds of domicile; a domicile of origin, a domicile of choice and a domicile of dependency.
Everyone is born with a domicile of origin, which is derived from their father’s domicile status at the time of their birth. If their parents are unmarried, the domicile of origin is that of the mother when the child is born.
A domicile of choice is acquired only after the domicile of origin is abandoned, broadly by severing all important links with the mother country. This can be a complex subject, involving regular evaluation of lifestyle and future plans. The UK tax authority naturally takes a keen interest in any claims to non-UK domicile status.
The third category, domicile of dependency, relates only to children under 16 and women who married before 1974. Children under 16 have their father’s domicile unless the father has died. Strange as it now seems, women who married before 1974 take their domicile from their husband and only lose that domicile status by abandoning it for a domicile of choice.
Remittance Basis of Taxation
The remittance basis of taxation means that non-UK domiciles living in the UK can pay tax only on their income and gains in the UK, leaving all their overseas income and gains outside the scope of UK tax unless they are brought into the UK.
There is no cost to using the remittance basis for the first 7 years a person is UK tax resident. After that there is an annual charge, the Remittance Basis Charge (RBC). The charge for individuals who have been UK resident for 7 out of the last 9 years is £30,000, which then increases to £60,000 (previously £50,000) for those resident for 12 out of the last 14 years. Currently an individual can choose each year whether or not to pay the RBC in order to use the remittance basis. There is no charge at any time for using the remittance basis if your overseas income and gains do not exceed £2,000 in a tax year.
A cost versus benefit exercise needs to be looked at each year to decide whether the UK tax saved by paying the remittance basis charge is greater than the cost of the charge itself. If costs can be saved an election can be made to pay the RBC for that year.
There are strict rules on what is treated as a remittance of income. Money in a bank account that contains income or capital gains as well as capital is a mixed fund. A transfer into the UK from a mixed fund will be treated as a remittance of income and then gains before any of the capital can be accessed. The mixed funds rules are complicated and extensive so it may be beneficial for non-domiciled individuals to segregate income and gains in order to have “clean capital” that they can move into the UK without triggering a tax charge.
The remittance basis of taxation is a complex area on which you should always take appropriate professional advice.
Reform to the taxation of non-UK domiciled individuals
The reform to the taxation of non-UK domiciled individuals was announced in 2015 and will be implemented in April 2017.
The government is introducing a deemed-UK domiciled status for individuals who have been resident in the UK for at least 15 out of the last 20 tax years, beginning on 6 April 2017. The concept of “deemed domicile” was previously only applied to Inheritance Tax (“IHT”) for individuals that were resident in the UK for 17 out of the last 20 years, however the test for IHT will also now be applied to individuals that have been resident for 15 out of the last 20 years from April 2017.
Once an individual has a deemed-UK domicile, they will retain their new domicile status for as long as they remain in the UK. Should an individual leave the UK, they will still retain their deemed status until they have been non-UK resident for at least 6 full tax years. Should 6 tax years pass before they return to the UK as a UK resident then they will have another 15 years until they are deemed-UK domiciled once more. This ‘6 year rule’ could have serious implications for IHT purposes as during an individual’s period of absence they may remain exposed to IHT in the UK on their worldwide estate.
To discuss this or your domicile status in more detail then please contact us to speak with a member of our team on a free and confidential basis.