When does someone have to become a non-dom for tax purposes?

I have been informed that I do not spend enough time in the UK to be tax resident there.

I complete my self-assessment annually and have a unique taxpayer reference and social security number. What are the rules in this situation?

Heather Rogers replies: I was happy about a question about domicile as it is a hot topic and widely misunderstood.

What does domicile mean?

Common law assigns a domicile of origin to each individual at birth.

This is normally determined by their parents – their father’s place of residence, or in the case of a single mother, their mother’s place of residence – and may differ from where the individual was born.

This is known as a ‘domicile of origin’. A person is domiciled in the UK, for example if his parents were born in the UK.

A person can instead have a ‘domicile of their choice’, which is more complicated.

This normally means making the UK your permanent residence, for example, and renouncing your domicile of origin from elsewhere.

However, it is not necessarily an easy process to have a domicile of your choice.

The third place of residence is known as a ‘deemed domicile’, and this only applies to your tax situation and is based on the number of years you have lived in the UK.

There is also the ‘domicile of dependency’, which the law assigns to an individual because of his lack of legal capacity and legal dependence on another person.

Is domicile the same as residence for tax purposes?

No, they are two completely different things.

You can become a non-resident for tax purposes, but you cannot be ‘non-dom’.

Tax residency is based on an individual being present in the UK for a certain number of days during the tax year, while domicile refers to one’s long-term residence.

Possession of a UK passport does not necessarily mean that you live in the UK, but it is an indication that someone intends to spend the rest of their life in the UK.

However, it does not in itself confer domicile. Place of residence is different from someone’s nationality.

Details about tax residence, and how you are taxed as a non-resident, as opposed to domicile, can be found here.

How does the tax system work for British doms and British non-doms?

1. People who are both UK and UK resident for tax purposes are taxed in the UK on their income on an ‘acquired’ basis.

This means they pay UK tax rates on their income wherever they are in the world.

They may be entitled to deduct tax already withheld by a foreign tax authority, but they will still need to declare it on their UK tax return. This also applies to capital gains.

2. If you are resident in the UK for tax purposes but have an address for residence elsewhere (you are a ‘non-dom’), you will not pay UK tax on foreign income or gains if both of the following apply:

– Income/gains are less than £2,000 in the tax year

– You do not bring it into the UK, for example by transferring it to a UK bank account

But if the income is £2,000 or more, you can:

– Pay UK tax on it – you may be able to make a chargeback, OR;

– Claim the ‘payment basis’. This means you only pay UK tax on the income or gains you bring into the UK, but you lose any tax-free income tax and capital gains benefits you may have been entitled to.

In addition, you also pay an annual contribution, depending on how long you have lived in the UK.

You pay an annual contribution of either:

– £30,000 if you have been here for at least seven of the previous nine tax years

– £60,000 if you have been in the UK for at least 12 of the previous 14 tax years.

Due to the fact that a non-dom has to pay up to £60,000 annually, it is only useful if your foreign income is significant.

Non-doms remain taxable in the UK on all income arising in the UK itself.

Residence rules also affect estate taxes and how your estate is taxed.

Details about non-residents can be found here.

How does someone become domiciled in the UK or lose their status?

If you are originally a UK resident, but you move abroad to take up residence in another country, then once you return to the UK you will be deemed to be UK resident for tax purposes on your return to the UK and for inheritance tax at the start of the second year of return to the UK.

This is called former domiciled residency status.

You may lose your resident status if you leave the UK and there are at least 6 tax years as a non-UK resident in the 20 tax years preceding the relevant tax year.

If you are not originally domiciled in the UK and you are not domiciled in the UK by choice, you could be domiciled under ‘deemed domicile’.

A person becomes a deemed domicile after 15 years of residence in the UK and then the ‘origination’ basis applies – which, as explained above, means that you pay UK tax rates on your income wherever in the world it arises.

What about your situation?

I don’t have the details of your circumstances, but I hope this gives you a quick guide to how UK domicile rules work for tax purposes, and helps you decide what to do next.

As you can see, domicile is a complex legal and tax area. Expert advice should be sought from a lawyer and a tax advisor with expertise in this area who are established and regulated in the UK.