Tax Talk: When domicile doesn’t translate to residency

read timeRead time: 4 mins

Recent questions about the tax status of Rishi Sunak’s wife have turned the spotlight on the meaning of resident and domicile. Phil Clayton explains.

A few weeks ago, there was a buzz around the terms residence and domicile. No sooner did the public discover that the Chancellor’s wife, Akshata Murthy, was a non-dom than everyone seemed to become an overnight tax expert. Scrolling through Twitter, LinkedIn and other social media platforms, many comments started with, “Well, if she’s living here…” or similar.

The concept of domicile is much more complex than where someone lives, and the debate around domicile and residence often conflates the two.

Stepping back from the political and ethical discussions around Ms Murthy, let’s look at the facts and the claims she had available to her as a result of her position.

UK tax residence

Some may see residence as ‘where someone lives’, or ‘where someone spends most of their time’. But it’s not always that simple. People could be considered UK tax resident whilst only being present here for a couple of months in a tax year.

The UK’s Statutory Residence Test (SRT) is one of the most detailed and complex residence tests in the world. HMRC’s guidance and legislation runs to over 150 pages. The complicated rules and tests applied to an individual’s circumstances could mean two people spending the same time in the UK end up with a different residence status.

We  would strongly suggest taking professional advice if your UK residence position is relevant to your tax affairs. For more details, see the guide: UK tax residency for individuals.

What exactly is domicile?

Domicile, on the other hand, is not always specifically related to where an individual currently lives. It is a concept based on where a person ‘belongs’, or where their ‘spiritual home’ is, even though they may not own or have access to any property there.

Other jurisdictions may have different rules to determine domicile. Here are the rules relating to England and Wales.

There are three basic types of domicile:

  1. Domicile of origin

This is the domicile that an individual acquires at birth – it is normally their father’s domicile.  There are additional rules to determine the domicile of origin where the circumstances are not straightforward.

  1. Domicile of dependence

An individual can acquire a new domicile of choice. This means abandoning their domicile of origin and voluntarily fixing their sole or chief residence in a particular place for an unlimited time, with no intention to leave.

  1. Domicile of choice

An individual can acquire a new domicile of choice. This means abandoning their domicile of origin and voluntarily fixing their sole or chief residence in a particular place for an unlimited time, with no intention to leave.

But it can easily be the case that someone is resident in a country for a substantial period of time and does not become domiciled there, because their stay has a temporary purpose.

What is the effect on taxes?

Once someone is considered a UK resident for the tax year, their default position is to be taxed in the UK on their worldwide income and gains.

But if they are considered non-UK domiciled, they can elect to be taxed on the remittance basis.

As a UK resident non-dom taxpayer, choosing the remittance basis means you only pay UK tax on your UK source income and gains, and on any offshore income and gains remitted to the UK in a tax year. However, you may miss out on certain tax allowances available to non-remittance basis users.

The rules for what is treated as a ‘remittance’ are quite wide. They cover any way in which value from funds or assets are brought to, or used in, the UK. So, individuals electing to be taxed on the remittance basis should be very careful and aware of these details. This could mean non-UK income and gains are kept outside the scope of UK taxes.

For the first few years of UK residency, there is no charge for choosing to be taxed on the remittance basis (although some allowances and exemptions are unavailable). But once an individual has been resident for seven out of the previous nine tax years, they must pay a Remittance Basis Charge (RBC) of £30,000. And this rises to £60,000 once resident for 12 out of the previous 14 tax years.

If someone has been resident for 15 out of the previous 20 tax years, they can no longer claim the remittance basis, and are treated as a ‘UK deemed domicile’ taxable on their worldwide income and gains.

Akshata Murthy’s position may have been debated in the court of public opinion and there may be moral issues linked to her particular position as the Chancellor’s wife. But the claims she made are likely perfectly legal. Indeed, they are in keeping with the type of tax planning we would advise many clients in a similar position to make in order to reduce their UK tax liability.

Although there have been changes to the remittance basis in this century, it remains, as it is known to encourage foreign investors and individuals to the UK. With recent news that a change in Government could have it scrapped, how long will it last? 

If you want to discuss your own residence or domicile position, please contact Phil Clayton.