Domicile and the existing tax treatment of non-domiciled individuals

4 minute read
16 July 2015

A brief reminder of the general rules of domicile within the UK, and the existing tax treatment of non-UK domiciled individuals.

Domicile - general principles

  • Under the general legal principles of the countries within the UK, an individual acquires a domicile of origin at their birth. This is usually the domicile of their father at the time but, in certain circumstances, for example if an individual's parents were unmarried at the time of his or her birth, he or she may acquire their domicile of origin from their mother.
  • A domicile of origin can be displaced by the acquisition of a domicile of dependency if the domicile of an individual's father or mother, as relevant, changes whilst the individual is under the age of 16 years.
  • From the age of 16 years, an individual can acquire a domicile of choice if they live in a country other than that of their domicile of origin and intend to remain there permanently or indefinitely.
  • An individual may lose a domicile of choice in a country by leaving it without intending to return there, and moving to another country without forming an intention to live in that country permanently or indefinitely. In that situation, his or her domicile of origin will revive unless and until the individual replaces it with a new domicile of choice.
  • None of these rules are changing as a result of the Budget announcement.

Existing tax treatment of non-UK domiciled individuals

Income tax and capital gains tax

  • An individual who is resident but not domiciled in the UK pays tax on their UK income and capital gains as they arise (the 'arising basis'), in the same way as a UK domiciled individual.
  • Such an individual may claim the 'remittance' basis of taxation in respect of their income and gains outside the UK. In this case, they will only pay UK tax on such income and gains if they 'remit' them to the UK.
  • For short term UK residents, there is no charge to claim the remittance basis. Once an individual has been resident in the UK in 7 out of 9 tax years (subject to a de minimis exception), an annual fee applies of £30,000 per annum, in addition to any tax due on remittances. Once an individual has been resident in 12 out of 14 tax years, the annual charge increases to £60,000 and, after 17 out of 20 tax years, the annual charge increases to £90,000.
  • A non-UK domiciled individual who is a settlor and/or beneficiary of a non-UK trust is entitled to claim the remittance basis in respect of any income or gains arising in the trust on which they would otherwise be liable to UK tax, whether as a result of a distribution or otherwise.

Inheritance tax

  • A non-UK individual is subject to inheritance tax (IHT) on their UK situate assets but not on any assets they own outside the UK. However, once a non-domiciled individual has been resident in the UK in at least 17 of the preceding 20 tax years ending with the relevant tax year, he or she is treated as 'deemed' domiciled in the UK for IHT purposes only.
  • A previously UK domiciled individual who acquires a domicile of choice elsewhere continues to be treated as UK domiciled for IHT purposes for three years after he or she ceases to be UK domiciled under general law, the 'three year rule'.
  • A non-UK domiciled individual can establish an 'excluded property trust'. Such a trust will be outside the scope of inheritance tax to the extent that the property held within it is situate outside the UK. This continues to be the case in respect of property settled into trust while the settlor was non-domiciled, even if the settlor subsequently becomes UK domiciled (whether for IHT purposes or generally).
  • UK situate property, such as residential property, for example can be taken out of the scope of IHT by holding it through a non-UK company or similar vehicle. In this situation, the non-domiciled individual or trustees of a trust own the shares in the company rather than the underlying UK situate property.

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