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Domicile and Deemed Domicile – Spot the Difference

Domicile and Deemed Domicile – Spot the Difference

Written by Tina Winter

In a previous article, we looked at the concepts of residence and ordinary residence – another crucially important concept for immigrants to and emigrants from the UK, as far as tax is concerned, is domicile. We looked at four sporting stars as examples, but sportspeople are not the only section of the population who come from overseas to the UK to live and work – with the opening of borders within the EU, this is now a commonplace issue, and one much beloved of exam question setters!

Domicile is a legal concept rather than a construct of the tax authorities. Broadly a person’s domicile is the country which is their natural home, to which they would eventually expect to return – their homeland. You can only have one at a time, and once you have one, it’s very hard to lose.

At birth a domicile of origin is acquired – normally following the father’s domicile status.

It is possible to acquire a domicile of choice – by moving permanently to another country and it becoming the centre of your life – but this takes some doing. Any ties with the original country of domicile are likely to mean that the domicile of origin prevails.

Deemed domicile is a concept of Inheritance Tax (IHT) legislation – if a non-domiciled individual has been resident in the UK for at least 17 out of the last 20 years, then they are treated as UK domiciled for the purposes of computing IHT liability, which is important for those with significant overseas assets as the table below shows.

IHT liabilityUK domicile / deemed domicileNon-UK domicile
UK assetsLiableLiable
Foreign assetsLiableNot liable

Domicile status also affects liability to Income Tax and Capital Gains Tax – the broad concept here is that non-UK domiciled individuals are only liable to UK tax on overseas income or gains remitted to the UK, “remitted” meaning paid across to the UK for the benefit of the individual or persons linked to them. In recent years this has made the UK an attractive place to live tax-wise for rich individuals (with good accountants!) coming from overseas – a veritable onshore tax haven.

HMRC caught up with this in the Finance Act 2008, which introduced a £30,000 annual tax charge for adults who have been resident in the UK for at least seven out of the last nine years and claim remittance basis. It’s a charge on the unremitted foreign income and gains that are left outside the UK, and is in addition to any tax which is paid on remitted income and gains. The Government has plans to increase the level of charge to £50,000 where an individual has been resident in the UK for 12 years or more.

The charge can be avoided by not claiming remittance basis for any particular tax year and paying UK tax on worldwide income and gains – probably not a course of action favoured by the likes of Roman Abramovich!