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13 Feb 2023
Trust structures holding UK real estate - an update on the Register of Overseas Entities and reporting requirements
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The International Tax Round Winter 2022
06 Dec 2022
Worldwide Disclosure Facility (WDF): HMRC promising 'many more' tax investigations
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In recent years, there has been an increase in the number of enquiries raised by HM Revenue & Customs (“HMRC”) into the domicile status of individuals, particularly those who have been resident in the UK for many years.
Whilst changes to the taxation of non-doms were made in 2017, which meant that those who are long-term residents are no longer able to claim the remittance basis, domicile under general law is still important.
What is domicile? Domicile is a concept in English law which is different from the UK tax concept of residence. It is unrelated to nationality. It is possible for an individual to be resident in one country, domiciled (for English law purposes) in a second country, and a national of a third.
Domicile is the country which a person has their official permanent home or has a significant connection with. There are three types of domicile under general law: domicile or origin, domicile of dependency and domicile of choice.
Domicile of origin
This is the domicile that is acquired at birth. It is normally taken from your father; however, if parents are unmarried or the child is born after the father’s death, then the mother’s domicile is normally acquired. It is important to note that the domicile of origin can differ from the country of birth, as it follows the domicile of the relevant parent.
Domicile of dependency
A child’s domicile will follow the person on whom they are legally dependent. So, if the domicile of that person changes, the child’s domicile will change and replace the domicile of origin. This happens until the child reaches 16.
Domicile of choice
After the age of 16, an individual can try to acquire a new domicile – a domicile of choice – by settling in a new country with the intention of living there permanently or indefinitely, you can change your domicile. However, it is very difficult to acquire a new domicile as there are no fixed rules or requirements and the burden falls upon the individual to prove they have acquired a new domicile – living in a country for a long time, although an important factor, does not alone prove a new domicile. HMRC would look at other ties connecting them to that country as well as clear evidence of the individual’s intention to live there permanently.
Prior to 6 April 2017, if you were resident but not domiciled in the UK under common law you:
- Were liable to UK tax on all your UK income and capital gains
- Were able to claim the remittance basis and only be subject to UK tax on your foreign income and capital gains when remitted to the UK
- Could claim tax relief on overseas workdays for the first three years you were resident in the UK
However, from 6 April 2017, a new set of rules for deemed domicile statuses came into force. If you are not domiciled in the UK under English common law, you will be treated as domiciled in the UK for all tax purposes if either Condition A or Condition B is met. If you meet the new deemed domicile rules you will not be able to claim the remittance basis of taxation and you will be assessed on your worldwide income and gains on the arising basis.
Condition A – To meet this condition you must:
- Be born in the UK;
- Have the UK as your domicile of origin;
- Be resident in the UK for 2017 to 2018 tax year, or later years
Condition B – Is met when you have been a UK resident for at least 15 of the 20 tax years immediately before the relevant tax year.
Linking domicile to residency
The significance of domicile goes beyond tax. Succession planning and the way assets are passed to the next generation may be affected by the succession law of an individual’s country of domicile. However, the most immediate impact of domicile status in relation to tax is that non-dom individuals:
- Can opt for the remittance basis of taxation
- Can restrict Inheritance Tax (IHT) to UK assets
- Can create the scope to establish a non-resident trust from which the individual can benefit
How can an individual maintain non-dom status?
Strictly, there is no need for a particular other country to be identified as the country to which the non-dom intends to move when the time comes. However, it can be helpful in discussions with HMRC to point to a particular country, which may not be the individual’s domicile of origin.
HMRC look at a number of factors in assessing whether an individual with a foreign domicile of origin has retained his non-UK domicile or has acquired a domicile of choice in the UK, including:
- the individual’s statements as to his or her intention to leave the UK in the future;
- the location of the individual’s permanent residence(s);
- the location of the individual’s business interests;
- the individual’s social and family connections.
There are of course a number of other factors that should be considered that essentially provide reasonable justification for one’s domicile status.
A particularly challenging aspect of domicile enquiries is the fact they look back over the life of the individual – and often of their parents – to establish their likely domicile status if it is unclear – which means there can be great difficulty in providing documentary evidence to help prove what may be well-known family history. However, domicile enquiries can also look into the future, seeking evidence of an individual’s stated objective of leaving the UK; this too can present evidential difficulties.
What will prompt HMRC to enquire into an individual’s domicile status?
There are of course many other triggers to prompt a domicile enquiry (for example, pressure on HMRC to improve tax collection, general dislike of all matters “offshore” including, perhaps most notably, the death of the taxpayer with a view to considering their Inheritance Tax position) which will be specific to the particular circumstances of an individual and the enquiry is likely to be lengthy and onerous in terms of the questions and information requested. Therefore, we recommend that rather than being reactive when a domicile enquiry is made, non-doms should take a proactive stance and continually maintain and add to a “domicile file” to safely record evidence of their origins, past actions and future plans to ensure that domicile status can be adequately evidenced to HMRC and the tribunal if required.
If you would like advice on determining your domicile status, speak to our international tax team today.Back to top