The topic of tax domicile status and how it works has been heavily featured in the news of late, thanks to Chancellor Rishi Sunak’s recent controversy involving his wife Akshata Murty who, it has been revealed, has been claiming non-UK domicile tax status. This means that she does not have to pay UK tax on any of her overseas income.
Ms Murty has chosen to be domiciled in India via her billionaire father Narayana Murty.
What is a non-dom?
A non-dom is a UK resident who declares their permanent home, or domicile, outside of the UK.
A domicile is usually the country his or her father considered his permanent home when they were born, or it may be the place overseas where somebody has moved to with no intention of returning.
To provide proof of non-dom status to HMRC, the individual must give evidence about their background, lifestyle, and future intentions, such as where they own property and where they intend to be buried.
If you have non-dom status, you must still pay UK tax on UK earnings, but are not obligated to pay UK tax on foreign earnings. The status can be given up at any time.
In Ms Murty’s case, she is retaining her non-dom status and Indian citizenship, but has pledged to pay UK tax on all her worldwide income, including dividends and capital gains, in the ‘British sense of fairness.’
Tax statuses in the UK
The extent to which an individual is subject to UK tax on income and gains, depends on two things:
- Tax Residence – usually determined by days present in the UK
- Domicile – a concept of common law and based on fact and intention. Domicile is also a key factor in assessing the extent of liability to UK Inheritance tax
UK Tax residence results in tax becoming due on worldwide income and gains generated as it arises. This is the case no matter where the sources are located.
However, UK Resident, non-UK domiciled taxpayers, can instead choose to claim the remittance basis (RB) of taxation. This potentially allows their overseas income and gains that remain outside the UK to be protected against the UK tax charge. The RB must be formally claimed via the UK self-assessment tax return.
This effectively allows those who qualify to limit their UK tax liability to sources of income and gains that are actually paid to the UK or are otherwise used in this country.
The RB election is free from any charge for the first 7 years of tax residence. However, after this, individuals must pay £30,000 per tax year to maintain it. The charge increases to £60,000 when an individual has been resident for 12 of the previous 14 tax years. Once 15 years of residence out of the previous 20 tax years is reached, the individual will automatically be deemed domicile in the UK and must pay UK income tax on worldwide income and gains.
Is it worth it?
Where RB is claimed, the individual will lose their entitlement to the UK personal allowance (£12,570) and capital gains annual exemption (£12,300).
If you are an individual with a more modest overseas income, it would be beneficial to seek professional advice, and have comparison tax calculations carried out. This should confirm the most tax efficient method of tax assessment to be claimed each year unique to your circumstances.
Impact of non-dom status on Inheritance Tax
Domicile status doesn’t just affect overseas income and gains; it dictates what tax applies on your death. The worldwide estates of UK domiciles are subject to UK inheritance tax at 40%; however, only UK assets of non-UK domiciles are subject to UK inheritance tax.
As discussed, individuals are deemed domiciled for inheritance tax purposes once they have been resident in the UK for any 15 out of the last 20 UK tax years.
Leaving the UK
If you are a non-UK domicile and you leave the UK, you can cease to be UK resident for six years and come back, with the same rules theoretically applying.
However, you may want to think about why you are coming back to the UK and for how long. HMRC may consider that anyone seeking to come back might actually have now acquired a domicile in the UK in law and be coming back because this is really where they want to be. Individuals doing that may want to think carefully about their true motives, and most importantly, how to provide as much evidence in support of their status as possible.
It is always best to seek expert advice which will to allow you to make the right decisions and prohibit you from making mistakes that may cost a lot of money.
As always, if you would like any further information regarding the above, please feel free to contact our offices by email firstname.lastname@example.org