Tax Guidance to UK & US Nationals.
Domicile
Domicile receives significant media coverage and has been subject to significant changes in recent years in the UK. Despite this, your domicile status in the UK continues to have a significant impact on your tax affairs. In our experience, there remains a lot of uncertainty regarding the concept
What Is Domicile?
Generally, you are domiciled in the country you regard as your permanent home. For UK tax purposes, you acquire your father’s domicile when you are born; this is your domicile of origin. You may acquire a domicile of choice elsewhere during your lifetime if your permanent home changes.
Why Is It Beneficial To Be Non-Domiciled In The UK?
For a foreign national who is resident in the UK, but is not UK domiciled, there is the option to elect to be taxed on the remittance basis (rather than the arising basis). The remittance basis of taxation allows you to only be subject to income tax on investment income and gains that are held within or remitted to the UK, therefore removing from taxation gains and investment income which occurs offshore unless the funds are enjoyed or held in the UK.
There are also advantages available where employment income is paid to non-domicile individuals who are resident in the UK, but have non-UK workdays.
Your liability to UK inheritance tax is in part calculated based on your domicile status. Therefore, individuals who are not UK-domiciled can potentially avoid UK IHT on their non-UK sited assets.
Is It All Good News?
After the first seven years of UK residency, electing to be taxed on the remittance basis is subject to a charge of ￡30,000 that increases incrementally the longer you are resident in the UK.
You are deemed to be UK domiciled for IHT purposes once you have been UK resident for 17 out of 20 years. The mechanics of avoiding remitting your income to the UK can also be complicated. For example, spending in the UK on a credit card which is settled with offshore funds would be a remittance. Bringing items such as art and other luxury goods is also treated as a remittance. In fact, funding a lifestyle in the UK without generating an income resulting from remitting some income, or earning income in the UK, is almost impossible.
Taking advantage of the benefits available regarding workdays spent outside the UK also comes with the requirement to have a very specific offshore bank account structure, which is mandated by HMRC.
Establishing Your Domicile
In many cases, it will not always be clear where people are domiciled which could result in an unexpected tax charge. Until relatively recently, HMRC would provide a ruling on an individuals’ domicile upon request. However, they will no longer do so. It is now common practice to set down an individual’s circumstances and intentions in a document combined with a written opinion on their domicile status from a tax professional to provide more certainty in
this area.
Recent Proposed Changes In The Law On Domicile
In the 2015 summer budget it was proposed that individuals would be deemed domiciled in the UK once they have been resident for 15 out of 20 years. These changes will affect both income tax and inheritance tax. The proposed changes will become effective as of April 2017. The budget also announced changes which would limit the availability of individuals to break a UK domicile of origin by moving to a different country, but then return to the UK as a resident but still claim to be non-domiciled.
US Individuals
At a federal level, the concept of domicile is largely redundant as individuals will always be subject to US tax whilst you are either a citizen or a green card holder. However, several of the US state income tax systems include a domicile rule whereby an individual may break state residency but continue to be subject to state income taxes, as a result of their domicile status. To evidence an individual’s domicile, states look at connecting factors such as:
- Property ownership;
- Voting in state elections;
- Driver licence registration;
- Family connections; and
- Return visits.