Non-dom tax status has received more than its fair share of attention in recent weeks, thanks to Rishi Sunak’s wife, Akshata Murty. With news of Murty’s non-UK domicile tax status hitting the headlines, UK taxpayers might have been interested to learn that an individual’s domicile position can significantly affect how much tax is payable in the UK.
To be clear; claiming non-dom status is a legal and commonly adopted method of UK tax mitigation for those who are tax resident, but not domiciled in the UK. It legitimately enables taxpayers to shelter some or all of their overseas income and gains from UK tax charges.
The extent to which an individual is subject to UK tax on income and gains depends on two things:
- Tax residence – largely determined by days present in the UK, and
- Domicile – a concept of common law based on fact and intention. Domicile is also a key factor in assessing the extent of liability to UK Inheritance Tax (IHT).
Being a UK tax resident is the default position for UK taxpayers and means that tax is payable on worldwide income and gains, no matter where they are situated.
There are three different types of domicile
- Domicile of origin – usually inherited from the father’s domicile,
- Domicile of choice – acquired when there is a permanent or indefinite intention to settle in a new jurisdiction, and
- Domicile of dependency – following the domicile of parents up to the age of 16.
Whilst it is possible to change your domicile, in practice it is difficult to shake off a UK domicile of origin. This is because it requires relinquishing all ties with the UK and demonstrating clear evidence of an intention to settle and stay ‘forever’ in another country.
HMRC look for robust evidence such as finances, family ties, career choices, quality of residence, location and ownership of houses, citizenship in the new country, medical treatment and languages spoken to name a few. The burden of proof ultimately rests with the person involved and connected case law is complex and substantial.
Interestingly, a lost domicile of origin in the UK can very easily be reacquired. For example, if an individual was born in the UK and had a UK domicile of origin but permanently relocated overseas, acquiring a domicile of choice in another jurisdiction, on their return to the UK for just one tax year of residence, they would reacquire their original domicile of origin in the UK.
The remittance basis
UK resident, non-UK domiciled taxpayers, can choose to pay tax on the remittance basis (RB), effectively ringfencing overseas income and gains that remain outside the UK and protecting them against the UK tax charge. Although this might sound like a no-brainer, there are other things to consider before claiming the remittance basis.
- The first 7 years of tax residence are free of charge.
- After 7 years, individuals must pay £30,000 per tax year.
- When an individual has been resident for 12 of the previous 14 tax years, the charge increases to £60,000 per tax year.
- Once 15 years of residence out of the previous 20 tax years is reached, individuals are deemed domiciled in the UK and pay UK income tax on worldwide income and gains.
In addition to the direct charges for accessing the RB, individuals lose entitlement to the UK personal allowance (£12,570) and capital gains annual exemption (£12,300).
How we can help
It follows that for those with modest overseas income, it is worth seeking professional advice. We can help you determine your domicile status for UK tax purposes and advise you whether the remittance basis would be tax-efficient in your specific circumstances. Please do not hesitate to get in touch with Gunhild Dam, Steve Roberts or your usual Sagars contact.