Domicile and the remittance basis of tax

The rules for non-UK domiciles were the subject of much political discussion before the General Election. Although the Conservative manifesto only included a pledge to increase the annual tax charges, the subsequent Summer Budget announced further significant changes. Two of these are that, from 6 April 2017, the remittance basis of taxation will cease to be available to long term UK tax residents, living here for more than 15 years, and those with a UK domicile of origin. The detail is subject to consultation, but in the meantime it is useful to understand some of the basics of the current rules on domicile and income.

Domicile isn’t the same as residence

Domicile is a legal concept being far more “sticky” than residence and is very difficult to change. You begin with a domicile of origin, usually inherited from your father. This can be changed to a domicile of choice if you can demonstrate that you plan to remain in a particular country for the rest of your life. This can be very difficult to prove and if there is any doubt you generally revert back to your domicile of origin.

For inheritance tax (IHT) UK has historically deemed as domiciled those who have been UK resident in at least 17 out of 20 tax years. It is proposed that from 6 April 2017 this deeming period is to be commence a year earlier, and will extend to income tax and capital gains tax.

This domicile stickiness contrasts with tax residence, which can be easier to change on a year by year basis under the statutory residence test. These rules look at the combination of days you spend in the UK together with connecting factors, such as employment, family, previous residence and accommodation.

What income tax advantages can foreign domicile status give?

For those resident but not domiciled in the UK, foreign income that is not brought into the UK is not subject to UK tax if the “remittance basis” of taxation is chosen, instead of the usual basis of being taxed on worldwide income.

Since 2008 the rules have required a remittance basis charge to be paid for the special treatment where you have been resident in the UK for at least seven of the past nine tax years. The amount of this charge is £30,000 but increases to £60,000 or £90,000 depending on lengths of tax residency. There can be exemptions for those with under £2,000 of foreign income, but the remittance basis rules tend to benefit those with very high foreign investment income.  From 2017 it is proposed that remittance basis cannot be claimed after 15 years of UK residence, so the £90,000 charge will fall away.

Unusual aspects of domicile

It is currently possible for someone born and raised in the UK to be a non-dom if they do not plan to stay in the UK indefinitely and their father was a non-dom. Conversely, someone domiciled in the UK may spend all of their working life abroad but retain their domicile status in the UK if they plan to return.

In the North West, many second or third generation families with backgrounds in Ireland, Israel, China, India and Pakistan retain their non-dom status for tax purposes, even where they are British citizens.

Finally, domicile is linked to a legal jurisdiction, so “UK domicile” itself is a misnomer; instead it is England & Wales, Scotland or Northern Ireland, although generally the term “UK domiciled” is taken for tax purposes to mean domiciled in any one of the three territories.

Agreeing domicile with HMRC

It used to be possible to agree domicile status with HMRC using a form DOM1 but this is now resisted by the tax authority unless it is relevant to the tax at stake. There is a box on the tax return to highlight and self assess a domicile status outside of the UK where it is relevant to your tax liability.  However, the tax situation surrounding where you reside and/or are domiciled is a very complex area and specialist advice should be taken.

Proposed changes

With changes in store to the domicile rules for tax purposes from 6 April 2017, it is worth noting the basics above and speaking to your tax adviser on a regular basis to consider the Treasury consultation documents and draft legislation. These will gradually be released over the coming months, eventually become part of the 2016 and 2017 Finance Acts.

Lee Blackshaw, head of private client tax services at the Manchester office of Smith & Williamson, the accountancy and investment management group.