The UK tax code provides a preferential tax regime for those who are resident but non-UK domiciled. Although considerable changes have been made to the rules in recent years, it still remains a very attractive regime for non-UK domiciled individuals coming to live in the UK.
It is important for all individuals who wish to take advantage of the favourable tax rules for non-domiciled individuals to prepare a domicile statement, outlining the basis on which they consider they are domiciled outside the UK. This statement can be used as evidence if the position is challenged by HMRC.
Why is Domicile Relevant?
An individual who is not UK domiciled or deemed domiciled can access the following tax benefits:
- The remittance basis of taxation for overseas income and gains. The remittance basis of tax restricts the UK tax liability to UK source income and gains. Non-UK source income and gains are not taxed in the UK unless and until brought into (remitted) to the UK. Any non-UK income and gains retained outside the UK will not be taxed.
- No inheritance tax (IHT) liability for non-UK assets. Non-domiciled individuals are only liable to UK inheritance tax on UK assets. In addition, planning can be undertaken to ensure that most UK assets (with the exception of UK residential property) can be removed from the scope of IHT.
- Ability to continue to shelter overseas income and gains from UK tax, and overseas assets from IHT even after becoming 'deemed domiciled' in the UK (see below). This is usually achieved by settling non-UK assets into an offshore trust before the date on which the individual becomes deemed domiciled.
Under legislation that took effect from 6 April 2017, individuals are 'deemed domiciled' for all tax purposes once they have been resident in the UK in 15 out of the past 20 tax years. Deemed domiciled individuals are liable to tax on their worldwide income and gains, with no ability to elect for the remittance basis of taxation. In addition, their worldwide assets are liable to IHT.
Why prepare a Domicile Statement?
Over the past few years, HMRC has been increasing the number of tax enquiries into the domicile status of individuals. The recent Gulliver case highlights that taxpayers need to be able to justify their domicile status. Acceptance by HMRC of an individual's non-domicile status in one tax year does not preclude HMRC from opening an enquiry relating to a later tax year. In other words, a decision made by HMRC about an individual's domicile status in relation to one tax year is not binding in relation to a later tax year.
Where an individual's non-UK domicile status is relevant to their tax position, they may be required to justify their domicile status to HMRC. This could happen in the following situations:
- Any tax year in which an individual claims the remittance basis of taxation.
- At the time an individual settles overseas assets into an offshore trust.
- At the time of the individual's death.
A domicile statement can help to set out the facts and circumstances in which they claim to be non-UK domiciled, and can be used as evidence if required.
If a non-domiciled individual dies when resident in the UK, the onus is likely to fall on close family members to defend the deceased's domicile position in the event of a challenge by HMRC. A domicile statement will provide contemporaneous evidence of the deceased's intentions during his lifetime, which may otherwise be difficult to prove after the individual's death.
What should be included in a Domicile Statement?
- Details of the individual's background, including place of birth, and any periods of residence in other jurisdictions, with reasons for any changes in residence status.
- Connections to his/her country of domicile (this is likely to be the country of origin but may be another country if the individual acquired a domicile of choice in a different jurisdiction before coming to the UK), including family, financial and social ties.
- Details of the individual's assets or interests held in other jurisdictions, and dates of acquisition.
- Date UK residence commenced and travel patterns since arriving in the UK.
- Reasons for coming to the UK and how long the individual intends to remain in the UK.
- List of assets held in the UK.
- Details of family and social or other connections to the UK.
- Circumstances in which the individual is likely to leave the UK and/or return to their home country (or their country of domicile, if different).
The statement should contain as much information as possible, setting out all relevant facts and circumstances. It should be reviewed regularly, and updated as and when circumstances change.
Non-domiciled individuals who come to live in the UK can typically enjoy a privileged tax regime in respect of their non-UK income and gains, which can result in low rates of tax. Overseas assets can also be protected from inheritance tax.
An individual's domicile status is largely dependent on their intentions, and these need to be supported by the facts and circumstances.
As HMRC increase investigations into the tax affairs of non-domiciled individuals, individuals who wish to take advantage of their non-domicile status should be prepared to present a robust defence in the event of any challenge from HMRC. A domicile statement can greatly assist to provide evidence of an individual's intentions, where it is supported by the facts, and can be particularly useful in situations where enquiries are opened by HMRC after death.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.