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“…non-domiciles should give their estate and succession planning a great deal of consideration. In our experience, this is rarely driven purely by tax implications.”

The mysteries of non-dom status

The mysteries of non-dom status

Laura Harper anaylses the intricacies of the topical "non-domiciled" status 

The perception of ‘non-domiciled’ individuals in the UK has been tinged with negativity for some time now, perhaps most recently in relation to the wife Prime Minister Rishi Sunak. However, the rules applied to non-doms are complex, with ever-expanding global disclosure regimes and designed specifically to attract talent and wealth from outside the UK. While the tax treatment may seem favourable to those living in the UK for a short period, the rules try to balance the position for those who remain in the UK for longer stays.

The intricacies of the rules mean they are understood by relatively few and communicated poorly to the public at large. This may help to explain why non-doms have frequently been portrayed negatively in the media. In an effort to alleviate some of the mystery around the regulations, we have attempted to summarise how they operate here.

The concept of domicile

Domicile is a concept in English and Welsh law but it is not universal. Many countries don’t have a similar system and base their taxing rights on the (perhaps easier to define) residence rules which largely depend on day counting in any given jurisdiction. 

A domicile is generally used in personal legal situations, such as marriage and succession but does not necessarily correspond with nationality, citizenship or place of residence.

This can be particularly difficult to determine when a country is comprised of a number of different legal jurisdictions (such as the UK or the US, where each state has its own legal jurisdiction) or where a country’s borders have changed over time, such as India and Pakistan. You can, however, only have one domicile at any given time.

English law considers that everyone has a domicile acquired in one of the following ways:

A domicile of origin:

·        This is generally derived from the father’s domicile if the individual was born to married parents.  If they were not married the child would instead take the domicile of the mother at the time of birth.

·        Adopted children take the domicile of the adoptive father at the time of adoption.

A domicile of dependency:

·        If the domicile of the parent from which the domicile of origin is derived changed while under the age of 16, the minor will acquire a domicile of dependency based on that parent’s new domicile.

·        The minor’s domicile of dependency will continue until they choose to leave that country. On leaving, the domicile of origin will revive until they acquire a new domicile of choice, as described below.

A domicile of choice:

·        As touched on above, a domicile of origin or a domicile of dependency can be displaced by a domicile of choice provided that you reside in the new country and you plan to remain there permanently or indefinitely.

As a result, many people who come to the UK for work or to live with a spouse will set up residence there even if they may not intend to do so long-term, meaning they could spend many years here without ever becoming domiciled.

However, statutory provisions ensure that long stayers in the UK will be ‘deemed domiciled’ once they have been UK resident for at least 15 of the preceding 20 tax years. Residence is determined by the Statutory Residence Test (SRT) which provides an intricate set of rules to determine whether or not an individual will be considered tax resident in the UK in any given fiscal year.

The point at which an individual is deemed domiciled needs to be carefully reviewed because the provisions of the SRT mean one can be considered domiciled in the UK even after spending little more than 13 years here. Detailed records need to be kept to ensure that the point at which an individual will be deemed domiciled is accurately assessed.

For those who were born in the UK with a domicile of origin, known to HMRC as Formerly Domiciled Residents (FDRs), deemed domiciled status will be applied much sooner and will kick in whenever they are UK tax resident. This has implications for tax purposes as described below.

Why domicile matters

Those considered non-doms can be taxed differently to those who have a UK domicile in relation to income tax, capital gains tax (CGT) and inheritance tax.

Non-doms can claim the remittance basis of taxation, enabling them to shelter foreign income and gains from income tax and CGT charges in the UK unless or until these funds are remitted to the UK.  It is possible to make remittances indirectly, such as paying for services provided in the UK like legal fees or renovation costs, along with actually transferring funds to a UK bank account.

With careful planning, it may be possible for those who are UK resident but not domiciled to use capital and income generated prior to becoming UK resident. These funds, often referred to as clean capital, can be brought into the UK without incurring any tax charges but must be carefully segregated from accounts that will generate income or gains while resident in the UK.

The remittance basis is free to claim for the first seven out of nine tax years as a UK resident and you can opt in or out on an annual basis. To use the remittance basis within the eighth to twelfth year of UK tax residence, HMRC charges a fee of £30,000 per year and this increases to £60,000 for years 13 to 15. Thereafter, you will be considered deemed domiciled and it is no longer possible to claim the remittance basis of taxation. As FDRs are considered deemed domiciled while resident in the UK, the remittance basis is not available to them.

A further consideration for non-domiciles is inheritance tax (IHT). While non-domiciled status is maintained, only UK situs assets within their estate will be subject to IHT. However, once deemed domiciled, the individual will be assessed for UK IHT on their worldwide estate.

Planning to move assets into an offshore trust to remove them from the individual’s estate, and, therefore, from IHT is available but it is often costly and time consuming to do. Having assets in a trust rarely results in a ‘tax free’ outcome, particularly where the assets held in trust are income producing and that that income is required by a UK resident beneficiary.

Accordingly, non-domiciles should give their estate and succession planning a great deal of consideration. In our experience, this is rarely driven purely by tax implications. The increased levels of cross jurisdictional disclosure between tax authorities also means that it is difficult for assets to be ‘sheltered’ offshore now. When assessing the exposure to UK tax for a non-domiciled person, it is also worth considering any double taxation treaties made by the UK. There are many that deal with income and capital gains tax but far fewer that encompass IHT. 

The treaties signed with France, Italy, India and Pakistan, however, can be especially advantageous in terms of IHT exposure for individuals who have maintained a domicile in one of these nations by essentially shielding them from the considered domicile restrictions. These need to be examined on an individual basis, because they each have unique requirements. But using these treaties might result in incredibly efficient succession planning, which is totally legal but may prove to be unpopular.

Laura Harper is a partner at Kingsley Napley LLP lharper@kingsleynapley.co.uk

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