There are over 1000 reliefs in the UK tax system – some are well known, like those linked to Individual Savings Accounts (ISAs). Others, such as the advantages for Indian-domiciled UK residents, are less well known - at least until recently.
Non-UK domiciled status provides access to the ‘remittance basis of assessment’ for income tax and capital gains tax purposes and exclusion from Inheritance Tax (IHT) for non-UK assets (in some circumstances). In many cases it remains beneficial and open to foreign nationals to claim on their UK tax return, including people born in India and with strong Indian connections.
Domicile is a general legal concept but has been adopted into UK tax law: it is not the same as your nationality or tax residence status. For income and capital gains tax purposes, domicile status is important in determining whether a UK resident taxpayer is liable to UK tax on their worldwide sources of income and capital gains on an ‘arising basis’ (ie. as and when the income/gains arise) or whether they are eligible to claim the ‘remittance basis’, which is available to non-UK domiciled individuals (non-doms) only – see below.
There are several types of domicile for tax purposes:
It is only possible to have one country of domicile at any given time but an individual can be domiciled in a different country to where they are resident for tax purposes.
Domicile of origin
Every individual has a domicile, which they originally acquire at birth (domicile of origin). An individual normally acquires a domicile of origin from their father at birth (or from their mother if the parents were not married). This is not necessarily the country in which that person was born.
As long as these individuals can sustain an argument that their natural and permanent home is outside the UK and they intend to return to their home country at some point, their non-UK domicile of origin will be retained, and they will remain non-UK domiciled while continuing to live in the UK. However, where the individual’s intentions change or after a fixed number of years, they can acquire a UK domicile – with different implications for different UK taxes - see below.
Domicile of choice
An individual has a legal capacity to acquire a new domicile at the age of 16. In general terms, if an individual with a UK domicile of origin wishes to acquire a new domicile of choice outside the UK, they must either leave the UK and settle permanently in that other country, if living abroad already, intend to remain in that other country permanently or indefinitely. In either case, they will need to provide strong evidence that they intend to live in that other country ‘permanently or indefinitely’. Individuals with a non-UK domicile of origin, may acquire a UK domicile of choice if they decide to live in the UK permanently.
Domicile of dependence
Under the age of 16, an individuals’ domicile will follow that of the person on whom they are legally dependent (usually the father, but this could also be the mother or another legal guardian). If the domicile of that person changes, the child will automatically acquire the same domicile and the child’s domicile of origin will be displaced.
Deemed UK domiciled
For many years the above rules dictated the UK tax treatment for individuals for income tax and capital gains tax purposes but historically there was a separate rule that deemed an individual to be UK domiciled for IHT purposes after they had sent 17 out of the prior 20 years as a UK resident.
Since 6 April 2017, these rules have been combined into a general deemed domicile rule. Any foreign born non-domiciled individual who is resident in the UK in at least 15 of the past 20 tax years (including split years) becomes ‘deemed’ UK domiciled for income, capital gains and IHT purposes. This means long-term UK-resident ‘non-doms’ are taxable on a worldwide basis commencing from the 16th year (years of residence during childhood will count).
These individuals are no longer able to use the remittance basis for future offshore income and gains arising after the date they become deemed domiciled (i.e. from year 16). Prior overseas income and gains will remain taxable if remitted into the UK. Both offshore and UK assets will be subject to UK IHT when the taxpayer is deemed UK domiciled, subject to any specific double taxation treaty override – see below.
In establishing years of UK tax residence, the tax rules in place for the relevant year will be used, therefore, the UK Statutory Residence Test can only be used from 2013/14 onwards (prior to that the generally accepted practice at the time must be considered).
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Advantages of the remittance basis
If you are able to prove that you are domiciled in India (or any other country outside the UK), you can claim the remittance basis of taxation in the UK. If a non-dom elects for this basis of taxation to apply to a particular tax year, it restricts your UK tax liability on foreign source income and capital gains to sums ‘remitted’ (ie used/enjoyed in or brought) to the UK. There are strict rules around what transactions constitute ‘remitting’ money to the UK, for example, paying UK bills with an overseas credit card that is paid off from your overseas funds can create a taxable remittance. The rules are widely drafted and also catch indirect remittances and some loan arrangements.
Claiming the remittance basis for the first 7 years of tax residence in the UK is free. However, once a non-UK domiciled individual has been resident in the UK for 7 out of the previous 9 tax years, an annual Remittance Basis Charge of £30,000 becomes payable if the individual wishes to continue claiming the remittance basis. This charge increases to £60,000 per year after 12 out of 14 years of tax residence. It is payable in addition to any tax due on remittances of foreign income and gains to the UK.
Once an UK-resident non-dom has been resident for 15 out of the previous 20 tax years, they will acquire ‘deemed domicile’ in the UK and will not be eligible to claim the remittance basis of assessment and must pay UK tax on their worldwide income and gains (with credit given for any foreign tax paid).
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Inheritance tax – impact of the UK-India Double Tax Treaty
In general, IHT is charged at 40% on death on the value of a non-UK–domiciled individual’s UK assets, and on the value of the worldwide assets of a UK domiciled (or deemed domiciled) individual. However, Indian-domiciled individuals may enjoy beneficial treatment under the terms of the UK-India Capital Taxes treaty, which can override the UK deemed domicile rule and exempt certain non-UK assets from tax on death.
If a taxpayer who is domiciled within the UK dies here, they are liable to IHT on all their assets regardless of where they are situated. However, under the UK/India Treaty of 1956, the UK deemed domicile rule may be ignored when the individual is also domiciled in India under general law.
Therefore, if an individual dies while domiciled in India but they are deemed to be domiciled in the United Kingdom for UK IHT purposes at death, the estate at death will not suffer UK IHT on any property which is located outside the UK and which passes under a disposition or devolution regulated by a law other than that of Great Britain.
However, this does not provide complete protection from UK IHT. It does not exempt lifetime IHT charges which can sometimes arise i.e., immediately-chargeable gifts or failed potentially exempt transfers (PETs), where the individual has died within seven years of making a gift. In addition, there is no exclusion where UK residential property is owned via a non-UK entity, such as a company or partnership.
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Proving your domicile status to HMRC
In practice, non-dom issues are rarely as clear cut as the basic rules set out above. Tax disputes often arise with the UK tax authorities over whether an individual has retained their domicile of origin or has if fact chosen to become domiciled in the UK because they have stayed in the UK for many years.
HMRC is progressing a number of enquiries into the domicile status of such individuals - see our commentary on the Embiricos case and Partial Closure Notices. HMRC now get a considerable amount of information on the overseas income of UK residents and is taking ever more action to pursue UK tax on it – we expect this to lead to more challenges on the status of UK resident non-doms.
While it is not possible to get a standalone ruling on your domicile status from HMRC, it is sensible to get expert advice on your status and to document key issues that affect that status before you make any related claims through your UK tax returns. Should HMRC enquire into your position, having contemporaneous documentation available will significantly reduce the risk of an expensive dispute with HMRC.
Help and advice
For a no obligation discussion on the UK tax position of your worldwide income and assets, please feel free to get in touch with Piyush Patel and Vishal Patel or use this form.
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