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Tax Optimisation Through Domicile

Domicile is a legal concept of tax law in the United Kingdom and some other countries. The word may sound unfamiliar, but if you have ever looked into tax optimisation for individuals in the UK, you have certainly come across this term.

Domicile indicates that a taxpayer belongs to a certain jurisdiction either by birth or choice. Some sources do not differentiate between domicile and permanent residence. However, this approach is not recommended. For example, most foreign nationals who have been UK residents for 10–15 years retain domicile of birth. Relatively recently, a new legal concept has been introduced to the UK legal practice – deemed domicile. If you are not an expert in the Britishlegal system, you risk getting lost in all these legal terms.

This article explains in detail the main concepts of the UK tax law. However, it will still be difficult for you to do tax planning and tax optimisation on your own. For this, you need to consult qualified experts. The article provides only general information about domicile, its types and ways of tax optimisation. 

What Is Domicile of Origin?

If your father and you were born in the United Kingdom and you live here, your domicile of origin will certainly be the UK. However, the most important criterium is not your place of birth or your residence, but your origin.

For example, a UK citizen can live and work abroad for many years, be a tax resident of another country and pay income taxes there, while still retaining UK domicile. In this case, British inheritance tax of 40% will apply to all their foreign assets.

British domicile implies stronger legal connection with the country than residence, tax residence and citizenship. The reasons are the following:

  1. A citizen of any country can become a UK tax resident if they establish enough ties with the country.
  2. Residence means that a foreign citizen just gets a long-term visa to stay in the UK.
  3. Citizenship seems to establish close legal connection between resident and the country, but most of British citizens of foreign origin are not domiciled in the UK.

Domicile is characterised by the following facts:

  • A person can have multiple nationalities but only one domicile 
  • Every resident has a domicile
  • All else being equal, taxpayer’s domicile is determined by their place of residence
  • Every resident has a domicile of origin until they choose to change it
  • Domicile is not the same as ethnicity, citizenship or immigration status, though all three affect the domicile.

According to the UK law, even after obtaining UK citizenship, immigrants retain their domicile of origin. UK citizens can apply for a UK domicile (domicile of choice) if they want to spend the rest of their lives in the country. However, for this, they will need to cut all ties with the country of original domicile.

Why Is It Important to Know Your Domicile and Tax Status?

Domicile is not just a nice and slightly archaic-sounding concept of the British common law. Domicile determines whether a tax resident pays taxes on foreign income as well as inheritance tax on foreign property and expensive gifts. If you are domiciled in the UK, you will have to pay taxes on all your worldwide income. After you pass away, all your real estate and expensive gifts given to you in the last seven years will be subject to inheritance tax.

If you know your tax status and domicile, you can change the structure of your foreign estate and prepare your savings, so that you minimise the costs and save your money before you become a UK tax resident.

Immigrants who have already become UK tax residents but don’t have a UK domicile yet can benefit from a preferential tax treatment to avoid taxes on foreign income.

What Are Obligations of UK Tax Residents?

The UK tax law makes everyone, even non-residents, pay taxes if they earn money in the UK. Tax residents must declare and pay taxes on all their worldwide income for a tax year unless they are employed and have no other income but their salary.

Your tax return must cover the whole tax year from 6 April to 5 April. HM Revenue & Customs has deadlines for submitting tax returns as well as paying income tax in full or in advance. If you do not observe the deadlines, you will have to pay a large penalty.

Income tax in the UK is a progressive tax. Depending on your annual income, it will amount to 20–45%. There is also a tax-free allowance that is not included into the taxable base. In the 2021/2022 tax year, it amounted to £12,570. However, income tax is calculated slightly differently in England, Wales, and Scotland.

 

Income tax in England and Wales in 2022/2023 tax year

Annual incomeTax rate
Up to £12,5700%
£12,571 – £50,20020%
£50,201 – £150,00040%
Above £150,00045%

 

Income tax in Scotland in 2022/2023 tax year

Annual incomeTax rate
Up to £12,5700%
£12,571 – £14,73219%
£14,733 – £25,68820%
£25,689 – £43,66221%
£43,663 – £150,00041%
Above £150,00046%

If your income is above £125,140, you will not be able to benefit from the tax-free allowance.

How To Determine Tax Status in the UK?

Every British immigrant needs to know whether they are UK tax resident. However, it is even more important to know when they become one to make the necessary preparations. For example, you can increase your tax-free clean capital if you sell your real estate abroad and deposit money to your bank account before you become a UK tax resident. 

To determine the tax residence status, the HM Revenue & Customs has introduced a Statutory Residence Test including a sufficient ties test. The first indicates how long you have been in the UK, while the latter shows your connection to the UK: family tie, accommodation tie, work tie, country tie and 90-day tie.

With a calendar and a calculator at hand, you will be able to complete a UK Tax Residence Test on our website in ten minutes. However, it is far more important to know when you become a tax resident and under what criteria.

If you have some difficulties in completing the test, you can read an article on the Imperial & Legal website about it or contact us. Our qualified advisors will look at your case, tell you when you become UK tax resident and help you prepare your assets beforehand.

Can Immigrants Become UK Domiciled?

It has already been explained how to get UK domicile of choice. On 6 April 2017, a new type of domicile was introduced, namely deemed domicile. It is granted automatically.

You get deemed domicile if you have spent 17 out of 20 previous tax years in the UK. Under deemed domicile, you will have to pay taxes on all your income, and inheritance tax will be applicable to your foreign assets.

What Is Remittance Basis and How Can It Help Tax Optimisation?

Remittance basis is a preferential tax regime for non-domiciles. You pay income tax on all income earned in the UK and on foreign income that is remitted to the UK. That’s why, this tax regime is called remittance. 

Remittance allows tax residents to declare only the income that arises in the UK or is remitted here. It is important to keep in mind that if you claim remittance basis, you will not be able to benefit from £12,570 of tax-free allowance.

What’s more, you will have to pay to use remittance. Annual remittance basis charge amounts to: 

  • £30,000, if you have been a UK tax resident for 7 out of 9 previous tax years;
  • £60,000, if you have been a UK tax resident for 12 out of 14 previous tax years.

When you claim remittance basis, you can earmark an amount to pay the charge from foreign income that is as if taxed for that amount; it means you can bring more money into the country that has already been taxed. 

Sometimes, when your foreign income is not large, you can compare tax regimes with and without remittance and choose the best option.

If you have spent 17 out of 20 previous tax years in the UK as a tax resident, you become deemed domicile with the same obligations as domicile of origin. 

Imperial & Legal specialists have vast experience in effective tax planning. Specificities of British corporate and tax laws allow for significant and legal reduction of tax burden. However, it may be difficult to benefit from them if you are by yourself. Often, foreign nationals seek professional advice when it is too late already.

It is better to consult experts at an earlier stage to benefit from all the exemptions and allowances offered by the British legislation. For example, you may be advised to do the following: restructure and sell foreign assets, prepare clean capital, claim preferential tax regime and, after becoming deemed domicile, benefit from double taxation agreements. Elderly residents can leave the UK for six to seven tax years so that they lose their deemed domicile status.

Imperial & Legal advisors have a customised approach. After considering a client’s requests, they help them find the most effective way of tax optimisation.

FAQ about Tax Optimisation in the UK

How can I reduce taxes if I am already a deemed domicile?

Even if you are deemed domicile already and pay taxes on all your worldwide income, you can still benefit from double taxation agreements signed by the United Kingdom.

Such agreements mean that governments of two countries agree to tax residents by the place where their income originates. In other words, if you earn income in another jurisdiction where you have already paid taxes on it, you will not have to pay anything in the UK.

Can I pay a remittance basis charge with my foreign income? Will it be treated as remittance?

If your remittance basis charge amounts to £30,000 – 60,000, it is not prohibited to cover it with your foreign income. In this case, it will not be considered as remitted and taxed. However, there are certain rules that regulate payments of remittance basis charges. If you break them, it will entail additional costs. For example, if you use your foreign income to cover the charge, it must be directly transferred to the HM Revenue & Customs. If you are not sure that you can figure out all the procedures, contact our legal advisors.

What can an elderly domicile do so that their relatives do not pay taxes on their gifts?

If a present is made less than seven years before the domicile’s death, it will be treated as inheritance and relatives will have to pay taxes on it. The usual tax rate of 40% will be decreased by 20% starting with the fourth year. If a gift is received more than seven years prior to the domicile’s death, inheritance tax will not be applied.

The British tax law allows UK tax residents to give gifts to their relatives and friends if their annual value does not exceed £3,000. Inheritance tax does not apply to wedding presents, financial support for minor children, elderly parents and former spouses as well as regular donations.

What types of domicile exist in the UK?

According to the British tax law, there are three types of domicile in the UK:

  1. Domicile of origin
  2. Domicile of choice
  3. Domicile of dependency.

If your father has a UK domicile, you will automatically get UK domicile at birth. In most cases, people with UK domicile of origin are born and grow up in the UK. However, if your parents are British and you are born outside the UK, you still have a right to claim UK domicile of origin. However, if your father is not a UK domicile and you are bornin the country, you will not get UK domicile of origin.

Domicile of choice can be granted to immigrants over 16 years old if they leave their country of origin and plan to stayin the UK permanently.

Domicile of dependency is given to a minor child based on the domicile of a person they are legally dependent on. Forexample, it can be given to a child whose father is English.

Deemed domicile is not a legal concept of the British common law since it was introduced into practice artificially in April 2017.

Can I lose my deemed domicile status?

Yes, you can. You will lose your deemed domicile status if you stop being a UK tax resident for at least six tax years.

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