First. of all before we get in to what are the tax implementations of being a non-domicile, I want to explore what is a non-domicile or a non-dom as I’ll call it!
What is domicile and how do you become non-domicile?.
One of the most frequent questions that I get asked by U.K expats is how do I declare myself as non-dom for IHT (inheritance tax) purposes. This is because the U.K imposes a strict IHT of 40% of anything over 325,000 GBP (simple version without a partner or U.K residence). As there is a lot of misconceptions about the tax rules with this I will aim to clarify a few points for tax in this article.
Domiciled defined
The domicile is the country which a person officially has as their permanent home, or has a substantial connection with. When you’re born, you’re automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother.
The place where you are domicile is important because it depends on where you will pay tax. Taxes for U.K expats come in the form of income, capital gains, dividend, inheritance tax for personal taxation. Therefore, for U.K expats this can have an important factor on where and how they pay tax.
Here are two case studies taken from an advisor hand book to highlight this point of domicile
David’s father has a domicile of origin in Scotland. He was a university lecturer and had a post as a lecturer at the University of Tubingen in Germany. David was born there and spent the first twelve years of his life in Germany. His father then moved to Finland, having been appointed professor at the University of Uppsala. He retired to Scotland earlier this year as had always been his intention. David went to school in Germany and is currently at University in Munich. When he graduates he intends to do voluntary work in either Africa or Asia before deciding on a career. David has never been to Scotland. Where is David domiciled?
David is domiciled in Scotland, even though he was born in Germany and has never set foot in Scotland! His father never lost his Scottish domicile of origin – although he spent many years in Germany he never intended to stay there permanently – he always intended to retire to Scotland. At birth David acquired his father’s domicile of origin. He has not acquired a domicile of choice as he has not made up his mind where he wants to permanently and indefinitely reside.
Anne’s grandfather, domiciled in England, worked in the Indian Civil Service for over thirty years. He had intended to return to England on retirement but died whilst still in India. Anne’s father was born in India. He was educated in India and England and when in his early twenties moved to Switzerland to work for a bank. He acquired a Swiss wife and a Swiss domicile of choice. Both he and his wife inherited significant wealth and decided to leave Switzerland and travel. They lead a nomadic lifestyle. Anne was born in Sydney, Australia, and is currently working for UNESCO on a variety of short term projects. Anne has never visited England but hopes to do so in the near future. Where is Anne domiciled?
Anne is domiciled in England. Her father took his father’s domicile of origin but later acquired a Swiss domicile of choice. This was “lost” when Anne’s father left Switzerland (domicile of choice being based on permanent residence) and his English domicile of origin revived. So when Anne was born she acquired her father’s domicile of origin. She hasn’t acquired a domicile of choice to overturn that.
Tax on Expats Domiciled U.K
The U.K also has a part called Deemed domicile. This in the simplest forms that even if you are deemed non-dom, HMRC can class you as domiciled (6th April 2017) and can impose IHT
- If you have been a tax resident for the last 15 of the 20 income tax years before the relevant year.
- Or are deemed domicile under the HMRC
https://www.gov.uk/guidance/inheritance-tax-deemed-domicile-rules
With the tax for personal deemed domicile with the exception of IHT you have two options, remittance tax and arising tax.
Remittance Tax
Remittance tax, this is not for expats that are born in the U.K or have long term residence (see above for what classify as long term residence) but this taxes you only on the income in the U.K or the foreign income that you bring in the U.K.
For a remittance basis you will have 6 years where it is not charged then goes on a basis of two charges from 6, April 2017.
From 6 April 2017 the remittance basis charge changed to 2 levels of charge:
- £30,000 for non-domiciled individuals who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year
- £60,000 for non-domiciled individuals who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year
https://www.gov.uk/guidance/remittance-basis-changes
If you are U.K residence claiming you will not have any income tax, capital gains tax, or personal tax allowances unless less than 2000 GBP.
To claim for remittance you must claim for self assessment.
Arising Tax
An individual who is resident and domiciled (or deemed domiciled) in the UK will pay UK tax on the arising basis. This means they will pay UK tax on their worldwide income and gains regardless of whether they bring the income or gains to the UK.
An individual who is resident and not domiciled in the UK will have the choice of being taxed on the arising basis or remittance basis of taxation.
Tax on Income for Non-dom
If you are a UK resident non-dom individual, you will be liable to income tax on your worldwide income, unless you claim the remittance basis of taxation and keep your foreign income abroad.
IHT tax for expats
If you are UK resident non-dom or not deemed domicile (have been resident in the UK for less than 17 out of the last 20 tax years) in the UK you will only be liable for UK inheritance tax on assets situated in the UK.
However, if you become domicile or deemed domicile (been resident in the UK for at least 17 out of the last 20 years) in the UK, you will be liable for UK inheritance tax on your worldwide assets.
Reducing IHT for Non-dom
When it comes to non-dom for U.K expats it is at the jurisdiction of the tax man and they will have discretion if you are deemed domiciled or not. For the purposes of IHT as it is a high revenue earner for HMRC they are likely to be strict on this fact.
This is how to declare your self non-dom in the U.K
- Relinquishing your UK passport
- Severing all links with social organisations and join new organisations in your country of residence
- Purchase property in your country of residence and selling all your UK based property
- Closing UK bank accounts
For U.K expat living abroad you will have to declare that all your assets are outside the U.K unless the tax man can still call you domicile for tax purposes. I would seek professional assistance if you are to go down this route as it is the more complex of options for IHT tax planning read my guide on IHT tax.
If you did want more information of domicile or the difference on residency please get in touch at the link below.
