Taxation of UK resident ‘non-domiciled’ individuals

Whether Rishi Sunak’s family’s UK tax status will come back into the headlines with recent political developments and the leadership contest remains to be seen, but a point which is sometimes misunderstood, and which was not clear from some of the previous press coverage, is the difference between residence and domicile for UK tax purposes. 

Residence is determined by reference to a statutory test which considers the number of days an individual is physically present in the UK and other ties to the country. Tax residence can change relatively frequently, and it is possible for an individual to be resident in more than one country or indeed not technically resident in any country. A person’s domicile is often the country they consider themselves to be “from” and with which their connections are greatest. An individual’s domicile is normally inherited from their father and retained indefinitely unless it is displaced during childhood or by the acquisition of a different domicile of choice in adulthood.

The ability for individuals who are resident but not domiciled in the UK (“non-doms”) to be taxed on a special basis is long established. Broadly, while those who are born in the UK, to UK domiciled parents are taxed on their worldwide income and gains as they arise, non-doms can in some circumstances choose to be taxed on the remittance basis. Where the remittance basis applies, the individual is still subject to UK tax on all UK source income and gains but they may only pay UK tax on foreign income and gains to the extent that these are remitted, for example brought to or spent in the UK. Retaining a non-UK domicile of origin can also result in significant savings from UK inheritance tax.  

While the preferential tax treatment available to non-doms may be headline grabbing, it is nothing new and indeed was long considered essential to attract multinational businesses and ultra-high net worth individuals to the UK. The rules have been curtailed over the years so that when an individual has been resident in the UK for seven tax years, they must pay a charge in each subsequent tax year in which they wish to claim the remittance basis on unremitted income or gains of more than £2,000. The charge starts at £30,000 and increases to £60,000 after 12 years of residence before the remittance basis becomes unavailable when an individual has been resident here for at least 15 out of the last 20 tax years and they become “deemed domiciled”. The introduction of the charge means that only the very wealthy would typically find the remittance basis beneficial long term.

It is extremely difficult to displace a domicile of origin with a domicile of choice. In order to do so an individual effectively needs to break ties with their country of origin and form the intention to remain in the new country of residence indefinitely. Given the strong connections some individuals retain with their country of origin, it is possible for an individual to retain their domicile of origin, particularly where they hold an intention to return there to live. This works in the reverse so that individuals with a UK domicile of origin will find it extremely difficult to change their domicile for UK tax purposes. Even if they can achieve this, rules are in place so that their UK domicile of origin is revived if they ever return to live the UK.  

The introduction of the remittance basis charge and significant anti-avoidance rules to prevent contrived planning to exploit the rules have restricted the tax perks available to non-doms. 

It is however worth noting that planning is still available to non-doms that enables them to continue to mitigate UK tax on their foreign income and gains without the need for a remittance basis claim with a view perhaps to living in in the UK long term.   Such planning is specifically provided for within the UK tax rules and is therefore “blessed” by Parliament.  

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