A person’s domicile status is a question of fact and is based on a range of factors, including questions such as where your father was born through to where you consider your permanent home to be. Domicile matters for UK tax purposes, because non-UK domiciled individuals (non-doms) can generally access preferential tax rules that are not available to those domiciled in the UK. The tax treatment of non-doms has changed over time, but currently most non-dom tax benefits end once an individual has lived in the UK for 15 of the previous 20 tax years (the 15-year rule).
Changing domicile status is very difficult, because the concept looks at long-term intentions rather than short-term plans. An Italian moving to the UK to work is very unlikely to become UK domiciled under general law if they plan to leave again when they retire. Regardless of this, after living in the UK for 15 years, they will become ‘deemed domiciled’ in the UK for tax purposes from the start of the following tax year, at which point they will be taxed on foreign income and capital gains on the same basis as an individual domiciled in the UK under general law.
So why is HMRC investing resources into challenging domicile status that will automatically change for tax purposes after 15 years anyway?
There is one big tax difference between a person who is UK domiciled under general law and someone who is deemed-domiciled under the 15-year rule. A deemed-domiciled individual in these circumstances is not taxed automatically on gains or foreign income of an offshore trust they created before their domicile status changed, and in which they have retained an interest. By contrast, a UK domiciled settlor is taxed on all income and gains of such an offshore trust as they arise. This is an easy point to miss, and it is possible that long-term residents who have settled permanently in the UK will be oblivious of the fact that they should now be declaring trust income and gains.
The situation is not helped by the fact that most people do not really understand the meaning or significance of domicile, and the status of an 80-year-old living in sheltered accommodation is not easy to untangle if they are a proud Italian at heart but realistically are unlikely ever to set foot outside the UK again.
Politics is also likely to play a part in HMRC’s increased interest in non-doms. The Labour party has already published plans to abolish the favourable non-dom tax status, and it would be no surprise to see the Conservatives announce a review of the taxation of non-doms to counter this. Whatever the government, change is coming to the tax treatment of non-doms generally, and the growing focus of HMRC in challenging existing non-doms is likely to be a sign of things to come.
For long-term residents in particular, non-dom status is likely to be increasingly challenged by HMRC whatever happens to tax rules. Assuming that someone is non-UK domiciled today because they were treated that way a decade ago is not a compelling argument, and non-doms with international assets or trusts could be in for a nasty surprise if their tax affairs are not up to date.