This issue was written before the March 2017 budget and the Finance Bill 2017.
Sarah Bradford takes a look at the new deemed domicile rule that will apply from 6 April 2017, and what it means for non-UK domiciled individuals.
An individual’s domicile status affects their liability to UK tax. Broadly, individuals who are resident in the UK but not domiciled can opt to be taxed on the remittance basis, and pay UK tax on foreign income and gains only to the extent that they are remitted to the UK.
However, the ability to use the remittance basis is dependent on payment of the appropriate remittance basis charge, either £30,000, £50,000 or £90,000, depending on the number of years in which the individual has been resident in the UK. The highest charge applies where an individual has been resident in the UK for at least 17 of the previous 20 tax years, and the £30,000 charge bites once an individual has been resident in seven of the previous nine tax years.
By contrast, a person who is resident and domiciled in the UK will pay UK tax on their worldwide income and gains, regardless of whether those income and gains are brought into the UK.
Domicile status also plays an important role in determining whether someone is liable to inheritance tax (IHT). Those who are not UK domiciled are normally outside the charge to IHT on overseas assets, although prior to 6 April 2017, a deemed domicile rule applies for IHT purposes only, treating someone as UK domiciled for IHT purposes once they have been resident in the UK for 17 of the previous 20 tax years.
The new test
A new deemed domicile rule will apply from 6 April 2017 onwards for all UK tax purposes. Under this rule, an individual who has been resident in the UK for at least 15 of the last 20 tax years will be treated as UK domiciled.
This will mean that:
- the individual will be liable to UK tax on foreign income and gains, regardless of whether they have been remitted to the UK;
- the opportunity to elect to use the remittance basis will not be available (and consequently the highest remittance basis charge of £90,000 applying pre-6 April 2017 where an individual is resident in the UK for at least 17 of the previous 20 tax years will become redundant);
- the individual will be within the charge to IHT; andthe current deemed domicile rule for IHT will be replaced by the new deemed domicile rule (which is slightly different than the deemed domicile rule for other taxes).
Where a person is deemed to be UK domiciled under the new rule, they will be treated for UK tax purposes in the same way as a person who is actually UK domiciled.
Determining whether the rule applies
In working out whether a person will be deemed to be UK domiciled under the new rule, it is necessary to look at their residence history and count whether they have been resident in the UK in at least 15 of the previous 20 tax years.
Whether a person was UK resident or not for a particular tax year is determined by reference to the tax rules that applied at that time – so under the statutory residence test for 2013/14 onwards, and previously by reference to the rules applying prior to 6 April 2013. In counting years of residence, those years during which the individual was under the age of 18 are taken into account.
Example: Deemed domiciled in the UK
Jan came to the UK from Poland in 2000. It is his intention to return to Poland, and hitherto he has retained his Polish domicile. He has been resident in the UK for 2000/01 and each subsequent tax year.
On the introduction of the deemed domicile test from 6 April 2017, Jan will be deemed to be UK domiciled for UK tax purposes, as he has been resident in the UK for more than 15 of the previous 20 tax years.
Retaining a foreign domicile
Having a non-UK domicile can be beneficial, both from IHT purposes and also where a person has substantial foreign source income and gains which are not remitted to the UK, such that it is cheaper to pay the remittance basis charge rather than UK tax on those income and gains.
If a person wishes to escape being domiciled in the UK, they will need to take action to avoid becoming caught by the deemed domicile rule by making sure that they remain non-resident for sufficient years to prevent the deemed domicile rule from applying, and spending sufficient time abroad to stay non-UK resident for enough tax years.
Practical Tip :
Residence planning is essential to retain non-UK domiciled status and to avoid being caught by the deemed domicile rule applying from 6 April 2017. However, remember that double tax relief is generally available if income and gains are liable to both UK and foreign tax.
