Domiciled, non-domiciled and the remittance basis of taxation
13 May 2022
13 May 2022
Niki Patel, Tax and Trusts Specialist, Technical Connection Ltd
We have recently seen numerous press articles regarding Akshata Murty’s non-UK domiciled status. The tax planning opportunities for these individuals can be vast. However, advice in this area will always be essential.
In this article I provide an overview of what it means to be UK domiciled, non-UK domiciled and the rules around the remittance basis of taxation.
The UK common law concept of domicile is complex to say the least.
There are three types of domicile under English law:
- Domicile of origin – this is determined at birth and is normally based on where a child’s father is domiciled at that time. If the parents aren’t married or the father died prior to the child’s birth, then the child takes on their mother’s domicile.
- Domicile of dependence – applies to women married before 1974 (whose domicile will mirror their husband’s) as well as minors and other legal dependents of any age who lack capacity.
- Domicile of choice – acquired by moving permanently to another country.
The general rule is that an individual is domiciled in the country where they have their permanent home, although from a UK perspective it is possible to be treated as UK domiciled even if the individual has lived abroad for a number of years. This is because it is very difficult to displace your domicile of origin - unless it is superseded by a domicile of dependence or a domicile of choice.
In England, from the age of 16, an individual may be able to acquire a new domicile of choice. However, to do so they need to demonstrate the following:
- They have settled permanently in the country in which they now consider themselves to be domiciled;
- They intend to stay there permanently;
- They have severed ties with the country of their domicile of origin.
Deemed UK domiciled
Rule changes in 2017, now mean that those who have been resident in the UK for 15 of the last 20 tax years, will be deemed domiciled in the UK. An individual can lose their deemed domiciled status for income tax and capital gains tax (CGT) purposes if they become non-UK resident and remain non-UK resident for at least six consecutive tax years and for inheritance tax (IHT) if they leave for at least three complete years.
Those who are UK domiciled, deemed UK domiciled and resident in the UK have to pay income tax and CGT on their worldwide income and gains. They are also liable to IHT on their worldwide assets.
An individual who is resident in the UK, but non-UK domiciled will be subject to UK tax on income generated in the UK, so for example, earnings, interest, investment and dividend income. However, they can decide whether they wish to pay income tax and CGT on their worldwide income and gains – known as the arising basis of taxation – or they can elect to pay tax on foreign income and gains they ‘remit’ to the UK – known as the remittance basis of taxation. In the latter case, depending on how long they have been resident in the UK, they could also be subject to a remittance basis charge (RBC) and may have to make a claim – please see below.
A consequence of claiming the remittance basis is that the individual will lose their entitlement to the personal allowance and capital gains annual exempt amount (which will remain £12,570 and £12,300 respectively until 2025/26) for the tax year in respect of which the remittance basis claim is made.
The rules are complex, but in summary:
- If the total amount of un-remitted foreign income and foreign chargeable gains for the tax year is less than £2,000, a claim doesn’t need to be made and the individual would not lose entitlement to their personal allowance or CGT exemption.
- If the individual has been UK resident in fewer than seven of the preceding nine tax years they do not have to pay a RBC to use the remittance basis of taxation.
- If the individual has been UK resident in at least seven of the nine preceding tax years, a RBC of £30,000 will be payable in order to claim the remittance basis of taxation.
- If the individual has been UK resident in at least 12 out of the past 14 tax years, a RBC charge of £60,000 will be payable in order to claim the remittance basis of taxation.
- If the individual has been resident in the UK in 15 of the last 20 tax years, they will be deemed UK domicile for all tax (income tax, CGT and IHT) purposes and can no longer claim the remittance basis of taxation.
- With regard to IHT, a non-UK domiciled individual will only be subject to UK IHT on assets situated in the UK.
These rules effectively mean that being taxed on the remittance basis can hold great financial benefits to a non-UK domiciled resident who has a significant number of offshore assets and a substantial amount of non-UK sourced money in bank accounts in other countries. This was the focus of the articles in relation to Akshata Murty. It has been reported that she moved to the UK in around 2015 and has been claiming non-UK domiciled status, which has allowed her to save a substantial amount of tax on dividends collected from an Indian-headquartered company founded by her father. Aside from paying the remittance basis charge, she would only be required to pay tax on funds which are actually remitted to the UK. Although, she has since revealed that while her tax domicile will remain in India, she will no longer claim the remittance basis of taxation and instead pay UK tax on her worldwide income.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.