The term ‘Non-dom’ has seen much press coverage of late, so we thought a brief summary of the concepts and tax implications would be worthwhile…
What is Domicile?
Although one of the key factors when deciding whether, or to what extent, an individual is liable to tax in the UK, domicile is a legal concept and does not have a specific definition for tax purposes. It is not the same as nationality, citizenship or residence and is often defined as the place where a person has their permanent home.
Unlike residency, a person can only have one domicile at any given time.
The different types of domicile
There are three distinct types of domicile:
Domicile of origin
Everyone has a domicile of origin at birth, which is normally the domicile held by their father at the time. If the child is illegitimate, the child takes the mother’s domicile. In Scotland, a child’s domicile of origin can be determined by reference to both parents, not just the father.
The domicile of origin remains unless or until it is changed by a domicile of dependency or a domicile of choice.
Domicile of dependency
The domicile of a dependent person is the same as the domicile of the person on whom they are dependent. This notably affects children under the age of 16 and also women married before 1 January 1974 who have not acquired an independent domicile of choice.
Domicile of choice
To acquire a domicile of choice, a person must voluntarily establish their sole or main residence in a particular place, with an intention of continuing to reside there for an unlimited time. Case law shows that to establish a domicile of choice an individual must both:
- Be physically resident in the new place, and
- Show they intend to make it their home for the rest of their life. This can be evidenced by property ownership, periods and quality of residence in a country, location of family and close relatives, retirement plans, the governance of any Wills and also any community links the individual has.
BUT… there is also the possibility of being “deemed domicile”. A person who is not domiciled in the UK under the three general laws above can still be treated as though they were domiciled in the UK for income tax, capital gains tax and inheritance tax purposes if:
- They have been UK resident for at least 15 out of the previous 20 tax years
- Were born in the UK with a UK domicile of origin, subsequently left the UK and acquired a non-UK domicile of choice and later becomes resident in the UK, or
- They had been UK domiciled under general law at any time in the previous three tax years (though this applies for inheritance tax only).
Why is domicile important?
An individual who is resident but not domiciled in the UK (a ‘non-dom’) may not have to pay UK tax on their foreign income and gains. Typically, the non-dom will not be tax resident in their country of domicile and therefore, it is possible for a non-dom individual to avoid a worldwide income tax assessment in either country.
The following summarises the general tax position of a domiciled and non-domiciled UK resident individual:
- A UK resident that is UK domiciled (including deemed domiciled) will pay UK tax on their worldwide income and gains as they arise, regardless of whether the income and gains arise in the UK or overseas. This is the called the arising basis of taxation.
- A UK resident with non-dom status will pay UK tax on their UK-sourced income and gains on the arising basis, and can choose to pay UK tax on their foreign income and foreign gains on either the arising basis or the “remittance basis” (see below).
What is the remittance basis?
Subject to a £2,000 de-minimis, non-doms have to specifically apply for the remittance basis of taxation, whereby overseas income and gains are only taxed if they are remitted i.e. brought to, used in or received in the UK.
To access the remittance basis, the non-dom must pay the following “remittance basis charge”:
- £30,000 if the non-dom has been UK resident in at least 7 of the previous 9 tax years
- £60,000 if the non-dom has been UK resident in at least 12 of the previous 14 tax years.
A non-dom who is nonetheless deemed domicile (see above under ‘The different types of domicile’) is unable to claim the remittance basis and must pay UK tax on their worldwide income and gains on an arising basis.
A consequence of claiming the remittance basis is the loss of certain tax allowances i.e. personal income tax and annual capital gains tax allowances.
Domicile and inheritance tax
Inheritance tax (IHT) is charged on transfers of assets by individuals. Domicile affects the scope of IHT, with UK-domiciles chargeable to IHT on worldwide assets and non-UK domiciles chargeable to IHT on UK assets only. Inheritance tax planning can therefore be important, particularly as a non-dom approaches being deemed domiciled in the UK.
As an individual will be deemed domicile in the UK for IHT purposes if they were UK domiciled at any point within the three years immediately preceding a transfer of assets, it is possible for someone to be UK domiciled for IHT purposes while being a non-domicile for income tax and capital gains tax purposes.
Transfers of UK assets between a UK domiciled spouse / civil partner and a non-domiciled spouse / civil partner are also within the scope of IHT to the extent they exceed £325,000, which is in contrast to the spousal / civil partner exemption which applies generally where both individuals are UK domiciled. It is possible however for a non-domiciled spouse / civil partner to elect to become UK domiciled for inheritance tax purposes only, but the benefits of this will depend on the individual circumstances.
Clearly, the issue and implications of ‘non-dom’ status does not affect everyone – the latest figures from HMRC suggest approximately 76,000 non-domicile claims were made out of around 12.2 million expected self-assessment tax returns – however, if this is something that you feel may be of relevance, then please do contact us.
