The fifteen year itch

The tax rules for non-domiciled individuals have been around for centuries and some argue that they are not relevant today. While this may be correct, legislation does provide tax benefits for those people who come to the UK. 

In recent years the government has announced changes to the treatment of non-UK domiciled individuals who are resident in the UK and these changes come into force on 6 April 2017. Before we look at these changes it is worth refreshing ourselves of the rules around domicile and residence.

Domicile 

When advising clients it is important to establish their domicile and understand how this works in England, Scotland, Ireland and Wales.

Domicile is linked to the individual country but we do talk about UK domicile as a whole, covering all the nations of the UK.

There are three types of domicile that can apply in the UK:

• Origin: This is acquired at birth and an individual will adopt the domicile of their father, and if the father dies or the parents are unmarried or divorced before birth then the mother’s domicile is used. On this basis, just because someone is born in the UK does not necessarily mean that they will have a UK domicile.
• Dependency: A child under the age of 16 will follow the domicile of the parent from whom they acquired their domicile of origin. If the parent acquires a new domicile of choice, the child will also adopt that domicile of choice. A domicile of dependency will apply to women who married prior to 1 January 1974 as they adopted the domicile of their husband from the date of marriage. If the marriage was on or after 1 January 1974 the woman retained her domicile of origin or choice if she had acquired one.
• Choice: This is where an individual takes up residence in a new jurisdiction, losing their UK domicile and acquiring a new domicile of choice. This can be difficult to establish as a client will need to sever ties with the UK with the intention of remaining in the new country either indefinitely or permanently. HMRC will generally not challenge someone who has become a UK domicile, but are more likely to investigate a claim that someone has become non-UK domiciled. 

Currently, with regard to inheritance tax (IHT) an individual who is domiciled in the UK will pay IHT on their worldwide assets, wherever they are located, whereas an individual who is non-UK domicile will only pay IHT on their assets situated in the UK. This can result in a massive difference when valuing an estate.

There is also a deemed domicile rule. An individual who has been resident in the UK for 17 out of 20 tax years will be deemed domicile at the start of the 17th tax year.

From that point, for IHT purposes, they will be treated as being domiciled in the UK and be taxable on their worldwide assets.

There are a number of longstanding double tax treaties meaning that individuals from India, Pakistan, France and Italy cannot be deemed domicile.

Residence

Whether an individual is resident in the UK or not will depend on a statutory residence test that was introduced from the 2013-14 tax year. 

We will not go into exact details in this article but there are three tests to establish if an individual is non-UK resident or UK-resident in a particular year. 

Read the full article.

Neil Jones is technical support manager with Canada Life’s  ican Technical Services Team.

Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.