Exploring domicile and taxation

Published by Tom Boniface on 24 May 2022

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Where do you stand on the domicile debate?  What is tax avoidance? What should people be permitted to do to minimise their tax?  How can the ‘non-dom’ status be justified when the vast bulk of UK taxpayers taxes and living costs are rising exponentially?

There are no easy answers to these questions.

Lets explore domicile. 

Domicile is a legal concept; it has no specific definition in the tax arena. It is often defined as the place where an individual has their permanent home. It is therefore comprised of two key elements – residence and an intention of remaining there permanently. A person can only have one domicile at a time (unlike residence).

In principle, there are three types of domicile: domicile of origin, domicile of dependency and domicile of choice.

Everyone has a domicile of origin at birth, and this usually remains in place unless it is changed by a domicile of dependency or a domicile of choice. If the latter is abandoned, the domicile of origin is revived.

In the UK (except Scotland), the domicile of origin is normally the father’s domicile. This can have tax consequences as illustrated below.

The main differences are that non-domiciliaries are able to:

  • use the remittance basis of taxation for foreign income and capital gains. Only income and gains used in the UK (remitted) are subject to tax;
  • shelter non-UK assets from inheritance tax
  • obtain certain reliefs for travel and subsistence when working in the UK.

Claiming the remittance basis has little cost for the first 7 years of residence. After that, it costs either £30,000pa (for years 7-12) and £60,000pa for years 12 -15. It is just a ‘parking fee’ – if the taxpayer uses the money in the UK subsequently, it is still taxable.

Although domicile has no real meaning in tax terms, ‘deemed-domicile’ is a tax concept, and a person who is not domiciled in the UK under general law is treated as though they were deemed-domiciled in the UK for  all tax purposes if:

  • they have been UK resident for at least 15 out of the last 20 tax years
  • were born in the UK with a UK domicile of origin, and are tax resident for any year subsequently.

Changing domicile is challenging and the burden of proof is on the person asserting the change (HM Revenue and Customs to prove a taxpayer has acquired a domicile of choice in the UK; the taxpayer to show they have a domicile of choice overseas. To establish a domicile of choice, the taxpayer must both:

  • be physically resident in the new place, and
  • show they intend to make it their home permanently or indefinitely – this is difficult to demonstrate and is fact-dependent.

The UK – India and UK – Pakistan double tax treaties override the UK’s deemed-domicile rules insofar as UK inheritance tax is concerned. For example, where an individual satisfied the deemed-domiciled rules but dies domiciled in India, Pakistan in accordance with the law of those countries, UK inheritance tax will only apply to property situated within the UK.

If a taxpayer wants to benefit from being non-domiciled, they must elect to do so on their tax returns (for income and gains). Therefore, this is an annual choice each taxpayer makes and is not automatic.

So where does this lie in the anti-avoidance spectrum?

There is no doubt that claiming the remittance basis is intended and permitted by Parliament. Put like this, it is no different to an ISA or a pension contribution.  But by definition, its only beneficial to the wealthiest. Yet the same can be said for EIS and SEIS investments.

‘Non-doms’ are generally wealthier than the rest of the population.  After all, they have the funds to both move countries, and make the tax claim worthwhile. The argument in favour of the non-dom regime is that the tax that they do generate in the UK (VAT, stamp duty, and income and corporation taxes) outweighs the potential loss of taxing them on their worldwide income and gains, and they move elsewhere.

Its not that the UK is unique here.  Ireland has more flexible non-doms rules. Italy, Portugal and Spain (the ‘Beckham’ tax) all have tax regimes to give incoming high net worth individuals beneficial tax rates compared to long term residents.

Yet there is little empirical evidence that scrapping the non-dom benefits would cause a flight abroad. Each time the non-dom rules get tightened there is commentary from lawyers and accountants along the lines of ‘babies and bathwater’.  But the threatened exodus is only a dribble. People like living in London.

The bigger issue perhaps is the perception that the UK tax regime lacks consistency. In a post Brexit world, we need to attract investment as well as skills and intellect (as well as develop our own).  If we change our long-standing regime, what does that mean for the stability of the rest of our tax system?

So where do you stand on this?

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