08 March 2023
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 a ‘non-dom’ can access preferential tax rules that are not available to a ‘UK dom’. The tax treatment of non-doms has changed over time, but at present most non-dom benefits end once they have lived in the UK for 15 out of the previous 20 years.
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 15 years living here, they will become ‘deemed domiciled’ in the UK for tax purposes, at which point they will be taxed on foreign income and capital gains on the same basis as a fully UK domiciled individual.
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 fully UK domiciled 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 tax status changed. By contrast, a fully UK domiciled settlor is taxed on all income and gains of an offshore trust as they arise. This is an easy point to miss, and it’s 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 profits.
The situation is not helped by the fact that most people do not really understand what domicile means, 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 non-dom status, and it would be no surprise to see the Conservatives announce a review 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 affairs are not kept up to date.