Understanding how domicile impacts your UK tax status is essential for tax planning and compliance. By being aware of the key considerations you can make informed decisions and optimise your tax situation while ensuring compliance with UK tax laws.
Domicile refers to your permanent home or the country to which you have the closest ties. It is different from residency, as domicile is a broader concept that takes into account factors such as intent, family connections, and financial interests. Your domicile is typically acquired at birth, and it can be challenging to change unless certain criteria are met.
When it comes to your tax status in the UK, domicile plays a crucial role. Your domicile status can have significant implications for how your overseas income and gains are taxed, as well as your UK inheritance tax exposure.
Here are some key points to consider:
Deemed domicile
Regardless of your domicile under common law, you are automatically treated as domiciled in the UK for tax purposes if you have been resident here for more than 15 out of the previous 20 tax years. Equally, you can lose deemed domiciled status if you leave the UK and there are at least six tax years as a non-UK resident in the 20 tax years before the relevant tax year.
Worldwide income and gains
If you are deemed domiciled in the UK, you will be subject to UK tax on your worldwide income and gains. This means that all income and gains, regardless of their source, will be subject to UK taxation. It is essential to understand the implications of worldwide taxation to properly comply with UK tax laws.
Non-domiciled status
If you are a UK resident but not domiciled in the UK, you have the option to claim the “remittance basis” for your overseas income and gains. The remittance basis allows you to only pay tax on overseas income and gains that are remitted (sent) into the UK. This means that your overseas income and gains will remain outside the scope of UK tax unless and until they are remitted to the UK. There is a four-year time limit from the end of the year of assessment to make a late claim for remittance basis to apply.
Remittance basis requirements
To claim the remittance basis, you must meet specific requirements. These include:
- Taxable income amount
If you have unremitted foreign income and gains above £2,000 in a tax year, you can claim the remittance basis.
- Remittance basis charge
If you are non-domiciled and have been resident in the UK for at least seven of the previous nine tax years, you may need to pay a Remittance Basis Charge to claim the remittance basis.
- Election and reporting
You must make an election to claim the remittance basis and report the remittances made to the UK to HM Revenue and Customs (HMRC) accurately.
Mixed fund rule / Segregation of clean capital
The mixed fund rule is another important aspect related to domicile and tax status. Under this rule, if you have a mixed fund (money or other property which contains more than one type of income or capital or income or capital from more than one tax year) there are strict rules that you must apply to identify which amounts of income and foreign chargeable gains from within a mixed fund you have remitted. Failure to properly segregate the funds can result in unintended tax consequences.
Inheritance tax
Domicile also impacts your exposure to inheritance tax (IHT) in the UK. If you are domiciled or deemed domiciled in the UK, your worldwide estate will be subject to IHT upon your death. However, there are certain exemptions and reliefs that can help mitigate IHT liabilities, such as the spouse exemption and the annual exemption. There are also situations where assets in other jurisdictions may also be subject to inheritance taxes/estate taxes in those jurisdictions, so it will be important to consider double tax treaty protection.
With over 20 years of experience helping international clients with their tax affairs, at Libra, we’ll talk through your international tax questions in the context of your wider personal financial and tax position, and work with you to develop a plan in line with your goals.
Talk to us about international tax and your personal tax plan.
Meanwhile, you can read more in our blog series which will include topics such as:
- Deemed domicile – Understanding its impact on IHT on international assets;
- Pre-immigration tax planning – segregation of income and capital;
- Moving to the UK to set up a business;
- The importance of wills;
- Tax-advantaged savings and investments.
Talk to us about your tax.
