Tax Domicile Status, what is all the fuss about?

12th April 2022 Wills, Trusts & Estate Planning

The UK press is currently reporting on calls for Chancellor Rishi Sunak’s wife, Akshata Murthy, to ‘come clean’ about her tax domicile status- but what is the problem and what could it mean for you?

What is all the fuss about?

Ms Murthy is non-domiciled for UK tax purposes as although she is resident here in the UK, and reportedly has been for some time, her country of domicile is India and she has demonstrated this fact to HM Revenue and Customs. It is likely that Ms Murthy has retained her domicile of origin which was gained at her birth in India. Her domicile of origin will never be extinguished but can be displaced if she acquires a domicile of choice, but this is notoriously hard to prove. There may also be reasons why Ms Murthy would choose not to sever ties with her original domicile in India. In fact most migrants are likely to be non-domiciled taxpayers, the difference being that not all of them are high net worth individuals who will benefit from potentially large income tax savings in the UK.

Non-domicile status means that Ms Murthy does not pay UK tax on gains and income arising abroad unless that income is brought into the UK, this includes reported dividends received from her family’s IT business which is headquartered in India. The effect of this is that Ms Murthy does not pay the 39.35% UK income tax usually paid by additional rate taxpayers on dividends arising from UK company dividend pay-outs. Depending on her remittance position and UK source income and gains, it is highly likely that Ms Murthy pays a considerable amount to the UK taxman. 

Although there appear to be substantial income tax benefits available to non-domiciled individuals, the same cannot necessarily be said for all UK taxes particularly for mixed-domicile couples such as Mr and Mrs Sunak. Such couples will not benefit from spouse exemption to inheritance tax which usually allows unlimited IHT free gifts between spouses in life and on death. This exemption is limited for mixed-domicile couples to £325,000 every 7 years (in addition to personal nil-rate bands of the same amount). This means that Mr Sunak will not be able to leave his estate to his wife nor will the couple be able to make transfers of large amounts between themselves without incurring a hefty inheritance tax bill unless she elects to be domiciled in the UK on her husband’s death.

It is not at all uncommon for foreign nationals in the UK to consider their domicile status for tax purposes. Here is what you need to consider if you think this may be relevant to you…

What is domicile status?

The extent to which an individual is subject to UK taxation depends on two things:

  1. Whether they are resident in the UK; and
  2. Whether they are domiciled in the UK.

The underlying principle is that those with strong links to the UK should pay more UK tax than those with weaker connections. The principles of residency and domicile are used to ascertain the strengths of an individual’s links to the UK but the two are not mutually exclusive, that is to say that it is possible for an individual to be resident in the UK almost indefinitely without acquiring UK domicile.

Determining an individual’s residence brings its own complications but generally relates to the place in which an individual lives or spends most of their time, then what is domicile? Broadly speaking domicile can be summarised as the country in which an individual has made their “permanent home”. There is no legal definition of the term, as such HMRC uses a number of factors to determine this and it is not merely a simple finding of fact.

What is the effect?

Simply put, a person who is registered as non-domiciled with HMRC does not have to pay UK tax on income gained overseas unless they bring their money into the UK. This can include income arising from foreign business assets or rent arising from properties owned abroad.

If a non-domiciled individual’s foreign income is less than £2,000 in a tax year and it is not brought into the UK, the individual will not be liable for UK tax on that income. If the same individual were to earn foreign income totalling more than £2,000 in any tax year there are two possibilities:

  1. The individual could pay tax on all foreign income and rely on Double Taxation Treaties to claim any tax paid twice. The UK has entered into such treaties with many countries worldwide, allowing some non-domiciled individuals to claim relief on tax paid in certain circumstances.
  2. UK resident, non-domiciled individuals may choose to pay tax on a remittance basis on their foreign income and capital gains which are actually brought into the UK. While this can bring significant tax benefits for a period, after time non-domiciled individuals must pay the Remittance Basis Charge to HMRC in order to continue benefitting from their non-domicile status. Those who have lived in the UK for at least 7 out of the previous 9 years must pay £30,000 per year to the government. This charge rises to £60,000 a year for those who have lived in the UK for 12 out of the previous 14 tax years. 

Under rules introduced in April 2017, regardless of whether they pay tax on a remittance basis, any non-domiciled individuals who are still resident in the UK they must pay tax on all of their worldwide earnings. In many cases, relief is given in the UK for foreign tax paid on foreign income and gains under double taxation treaties which the UK has entered into with many foreign countries to stop tax being charged twice on the same asset.

If you are resident in the UK or are moving to the UK soon and would like advice on your residence or domicile status for UK tax purposes please get in touch with a member of our team.

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Merry Abbott is a Solicitor located in Londonin our Wills, Trusts and Estate Planning department

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