I’m a Deemed Domiciliary, Get Me Out of Here!
7 December 2018
This article is aimed at individuals who are UK resident but not UK domiciled.
A guide to escaping the UK tax net
Your current tax position
This article is aimed at individuals who are UK resident but not UK domiciled.
Domicile is a general law concept and is, broadly, the place where you have your “permanent home”. It is far from unusual for a person to live in the UK for many years while retaining “non-dom” status. For more information about domicile click here.
As you will be aware, domicile is particularly important in the context of taxation as, along with residence, it governs your tax liability in the UK.
A UK resident non-domiciliary (“non-dom”) is eligible to claim the “remittance basis”. Broadly:
- you remain liable on your UK income, gains and estate; but
- you are liable for UK tax on income and gains arising outside the UK only if they are “remitted” (brought directly or indirectly) to the UK.
- A non-dom’s non-UK assets are outside the scope of inheritance tax.
- There are special rules for UK residential property (and for commercial property and property owning companies).
What happens if I become deemed domiciled?
A new regime was introduced for non-doms with effect from 6 April 2017. The benefits of non-dom status are now available for a limited period only of up to 15 years. You then become “deemed domiciled” in the UK.
A deemed domiciliary cannot claim the remittance basis and will be subject to UK income tax and capital gains tax on worldwide income and gains. Worldwide assets will be within the inheritance tax net.
Special rules apply to trusts set up before you become deemed dom (“Protected Trusts”) (as long as you do not become actually UK domiciled by deciding to remain here permanently or indefinitely).
“Protected trusts” are:
- free of inheritance tax on non-UK assets; and
- non-UK income and gains are not taxable in the UK unless and until the Trustees make distributions to UK resident beneficiaries.
The timing issue
You will become deemed domiciled once you have been resident in the UK for 15 out of the 20 tax years immediately before the current tax year.
- It is important to establish when you first became resident in the UK. Before the 2013 Statutory Residence Test, this was not always clear cut.
- Part years’ residence count. So if you arrived in the UK on 1 March, and become resident, that is year 1.
- It is possible to become deemed dom in a year when you are not UK resident.
In practice, you must leave the UK during the fourteenth year of residence in order to avoid becoming deemed domiciled. Once you are resident for part of year 15, you will automatically become deemed domiciled in year 16 even if you leave the UK in the course of year 15.
How do I avoid becoming deemed domiciled?
Become non-resident before you have clocked up 15 years of residence in the previous 20 years.
For example, the current tax year is 2018-19.
Alan became resident in the UK in 2003-4 and has been resident ever since.
He will have become deemed domiciled on 6 April 2018.
Ben first became resident in the UK in August 1998. He left the UK on 30 March 2000 and was non-resident from 2000-1 to 2004-5. He returned to the UK in June 2005.
Although he spent five years outside the UK, by 2017-18 he had been resident in the UK for 15 out of the 20 years up to that date so he too will become deemed domiciled on 6 April 2018.
If Alan and Ben had left the UK by 5 April 2017 (and were not resident in 2017-18) they would not become deemed domiciled.
Click here for more information on residence and becoming non-resident
How do I lose my deemed domicile?
Once you have become deemed domiciled you will remain deemed domiciled unless and until you no longer meet the 15 out of 20 year test.
In practice, this means that you must be non-UK resident for six complete tax years.
You will escape the UK tax net before then, but you will again become taxable (in some cases retrospectively) if you return too soon.
How will I be taxed if I become non-UK resident?
Once you have become non-UK resident, you are not liable for UK income tax on non-UK income. In principle, you can be liable for UK tax on UK source income but, in practice, most types of income e.g. interest and dividends are tax free. The main exception is rental income from UK property which remains fully taxable.
BUT if you return to the UK before 5 complete tax years have passed, you may become liable for income tax in the year you return on certain income you received whilst you were non-resident. Note also, that if you do not obtain “split year treatment” (see below) you may have to stay non-resident for six years to prevent this.
Capital gains tax
Once you are non-UK resident, you will not normally be subject to UK capital gains tax on any assets whether UK or non-UK. The major exception is that you will remain subject to tax on UK residential property (and from 6 April 2019, UK commercial property and shares in companies owning real estate).
BUT if you return to the UK before 5 complete tax years have passed, you may become liable for capital gains tax in the year you return on gains you realised whilst you were non-resident. Note also, that if you do not obtain “split year treatment” (see below) you may have to stay non-resident for six years to prevent this.
The inheritance tax rules are different.
Assuming you remain non-resident for three tax years, you will cease to be deemed domiciled for inheritance tax purposes at the start of year four. This means only your UK assets (if any) would then be subject to inheritance tax. Non-UK assets would become UK tax free.
BUT if you return within the six year period you will become deemed domiciled on your return so that your worldwide estate will again become subject to inheritance tax.
Resetting the “clock”
If you are non-resident for six complete tax years and become resident in the UK again at some time after that, you will have “re-set” your deemed domicile clock.
That means that you can be resident in the UK for a further 15 years without becoming deemed domiciled. It will also “re-set” your remittance basis clock so that you will again be able to claim the remittance basis and without charge for the first seven years of residence.
BUT if you spend further significant periods of time in the UK, HMRC may seek to challenge your actual domicile under the general law. If they succeed in the argument that you have settled permanently or indefinitely in the UK you will, in any event, be subject to income tax and capital gains tax on worldwide income and gains and inheritance tax on your worldwide estate.
If you set up a trust before becoming deemed domiciled but later become actually domiciled, the assets will remain protected for inheritance tax purposes but the trust is likely to be “see through” (so you will be taxable) in relation to income and gains.
Maintaining your non-UK domicile
It is important to maintain your actual non-UK domicile. You would become actually domiciled in the UK if you continue to live here and intend to do so permanently/indefinitely. HMRC would regard you as intending to remain indefinitely unless there were credible circumstances in which you would leave, e.g.
- when you retire; or
- when your children complete their education; or
- when the political situation in your home country improves.
Although domicile depends on your intention, that intention has to be supported by all the facts and circumstances. No one factor will be conclusive one way or another, you have to look at the overall picture.
Long residence, of itself, does not make a person actually domiciled (as opposed to deemed domiciled) nor does the acquisition of British citizenship.
The following is a, non-exhaustive, list of the sort of things HMRC may consider in determining a person’s domicile:
- Do you own a property in your country of domicile?
- How does that compare with your property in the UK in terms of size and value?
- Do you keep personal possessions, family photos, important documents there?
- Do you own or rent your UK property?
- Do you have family in the country of domicile?
- Do you have friends and other social connections in the country od domicile?
- Do you visit your friends and family?
- How often?
- Where are your finances based? In what currency are your investments denominated?
- Where are your advisors (lawyer/accountant/investment manager) based? This does not, of course, mean that you cannot use UK advisors for UK matters.
- Where have you made your will or wills?
- Do you spend time in the country of domicile and, if so, how much?
- Do you have any business interests including shareholdings in family companies in your home country? Are you involved in the business? Where do you carry out any work for it?
- Do you hold any directorships and if so, where are the companies based? Where are board meetings held?
- Do you belong to any clubs or societies in the country of domicile? What is your level of involvement?
- If you participate in religious activities, where? And what is your level of involvement?
- Have you served in the armed forces? If so, where?
- If you make charitable donations, where do you do so and where are the charities based?
- Where do you vote?
- What nationalities do you hold?
A link to HMRC’s internal guidance on domicile is below. It sets out the sort of information and documents HMRC may consider if they decide to look into your domicile. https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm23080
How do I become non-resident?
If you are currently a UK resident non-dom and wish to avoid becoming deemed domiciled, or if you are already deemed domiciled and want to escape the UK tax net, you need to become non-UK resident.
A statutory residence test was introduced in 2013. Before that, residence was largely a matter of HMRC practice based on case law which derived from a time when international travel and a global lifestyle were much less common. The old case law test could be very uncertain.
The Statutory Residence Test, although complex, will, in most cases, enable a person who wishes to be non-resident to make sure that that is the case.
If you are resident for part of the tax year you are normally treated as resident for the whole of the tax year. In some cases, it is possible to obtain “split year treatment”. If you are eligible for split year treatment, it means that you will be treated as UK resident up to the day you leave the UK and non-resident from the day after until the end of the tax year. (Similar rules apply for those coming to the UK). If split year treatment is not available then you would be treated as UK resident for the whole tax year which means that income arising and gains made after you actually leave may be taxable in the UK. In these circumstances a double tax treaty between the UK and the new country of residence may prevent a double charge.
Split year treatment is only available in certain, specified, circumstances. Generally these relate to situations where an individual:
- is going to work outside the UK;
- is coming to work in the UK;
- is ceasing to have a home in the UK; or
- is acquiring one for the first time.
For more information about the Statutory Residence Test and becoming non-resident, click here.
If you are planning to leave the UK, you will need detailed advice here and in the proposed country of residence in order to check what liabilities you might have in the UK and whether there is any pre-arrival planning you can carry out before becoming resident in your new country. You will need to consider whether you are leaving the UK permanently or, at least, long term or whether it is for a sufficient period to lose your deemed domicile only. You will also need advice to make sure that you become and remain non-UK resident and to determine whether you are eligible for “split year” treatment.
If you are not planning to return to your country of domicile, you will need to consider where you wish to become resident. A number of countries have special regimes which apply to new residents and are designed to attract high net worth families to go and live there.
These countries include:
If you would like to talk to us about your situation and how we can help you to make the right choices, get in touch with your usual NQP contact or Marilyn McKeever (email@example.com, 020 7067 7165).
These notes are a summary of the rules which do not cover all circumstances and do not constitute legal advice