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John Andrews of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk )highlights a topical tax issue in view of legislation affecting non-UK domiciled indivudals published in Finance Bill 2008.

Introduction

It is important for everyone in the UK to know whether one is domiciled in one of the countries of the UK for tax purposes.

If you are not UK domiciled there are advantages, although planned changes in the law effective from 6 April 2008 are trying to remove some of those, particularly for the wealthier resident.

In this article we are not looking at issues of “fairness” or “complexity” deriving from the little-known concept of domicile. We are merely trying to add some knowledge to those who might be helped by knowing their status. We are not attempting to be comprehensive in any way, but just providing enough information for individuals to enquire further if they feel that the provision could affect them.

What is domicile status?

• A domicile is the place where you belong in the world. It is usually a country.
• A domicile is with you from birth. Once you have it, it is difficult for you to get rid of it.
• You acquire your domicile in nearly all cases from your father; you therefore need to know where he was domiciled when you were born.

In a recent publication HMRC explained domicile as follows:

Domicile is not the same as nationality or residence. Broadly speaking, you have your domicile in the country that is your ‘real’ or permanent home. Everyone acquires a domicile of origin at birth. This is generally the country that your father considered to be his ‘home country’ at the date of your birth. If you have a domicile of origin outside the UK, then this is likely still to apply unless you have chosen to remain in the UK permanently or indefinitely. In most cases an individual’s domicile is obvious.

Example

If you were born and brought up in the UK and continue to live here, but your parents are Jamaican, you will probably have inherited a Jamaican ‘domicile of origin’ from your father. You may regard Jamaica as being your ‘real’ home and therefore retain that country as your domicile. On the other hand you may have chosen to remain in the UK indefinitely and thus acquired the UK as a domicile of choice.

It is difficult to give up your “domicile of origin” as many UK domiciled individuals have found when they have tried to persuade HMRC that they have now acquired a “domicile of choice” in a country with better weather and lower taxes.

Very few other territories have the same concept of ‘domicile’ as the countries of the UK.

So who might have a domicile outside the countries of the UK?

If you look at the HMRC explanation above, you will be able to see a number of common situations indicating (but not guaranteeing) a domicile somewhere else:

• Those who were born outside the UK
• Those whose father was born outside the UK, but were themselves born in the UK.
  This status applies to millions of people in the UK and the growth of eligible people in the UK has grown with every wave of migration.

Once you have acquired your domicile of origin in a country outside the UK and you still intend to go there at some point in the future, for example, to retire, then you will be likely to retain that domicile until it is clear that the anticipated event is not going to happen.

Why does a domicile outside the UK matter for tax purposes?

An overseas domicile can mean that you are not taxed in the UK on:

• Overseas investment income (bank interest, dividends etc.)
• Overseas rental income (a holiday home, temporary letting of your main home when working here)
• Capital gains arising on overseas assets (sale of your stocks and shares or your overseas property)
• Earnings from a job carried out exclusively overseas
• The full extent of your assets for the purposes of inheritance tax

All this is true provided you do not bring (either directly or indirectly) the overseas income or gains to the UK. This in itself can be a complex issue and the proposed changes in the law will make it even more so.

Why does this all matter to someone on a low income?

There are three main reasons to have your overseas domicile recognised by HMRC, if you are on a low income:

• If you have small amounts of overseas income, such as bank interest, or earnings, which you do not bring to the UK, the overseas domicile status can protect you from untold amounts of HMRC paperwork and bureaucracy.
• You can save yourself UK taxes by investing outside the UK. You can effectively have £1,999 of overseas income/gains tax free (assuming the proposed changes in the law go through).
• There may be advantages if you inherit assets overseas and these would suffer UK inheritance tax if you died (but this is a very complex area).

There are millions of “non domiciles” living in the UK who do not understand the concept of overseas domicile or its advantages. This is because they have been in the UK PAYE system and HMRC have never provided them with any information.

Non-domiciles who have £2,000 or more of overseas income in a tax year (such as earnings back “home” for a seasonal migrant worker or an international student) face either:

• a potential loss of personal allowances to set against their UK income, if they claim their non-domicile status; or
• (if they do not make this claim) being thrust into the paperwork jungle of double taxation agreements, self-assessment, dual residency and double tax relief.

There is still an outside hope that HMRC might streamline their processes to make it easy for the temporary migrant and therefore enable them to comply with UK law, rather than fail to do so because they did not understand some of the rules above.

Sadly, we think HMRC have not been given the resources to take on this enormous task and the voluntary sector are not geared up, or funded, to do so. The voluntary sector have enough problems in trying to  explain to these same temporary visitors the intricacies of  tax credits, to which most are entitled, and for which, unhelpfully, the rules about income are completely different.