Pre-deemed domicile planning

Shaharan Deen, 23 June 2023

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The taxation of ‘non-doms’ is often a hot topic within the media and last year there was further scrutiny in respect to Akshata Murty, the wife of Prime Minister Rishi Sunak who claims non-domicile status. The government have to perform this balancing act between appeasing the media and encouraging wealthy foreigners to live in the UK and invest in UK PLC.

In 2017, former Chancellor George Osborne implemented key changes for ‘non-doms’. These changes meant that individuals who’ve been resident in the UK for 15 out of 20 years or were born in the UK with a UK domicile of origin and return to the UK, are treated as ‘deemed domiciled’ in the UK for tax purposes.  

There is still opportunity to carry out tax planning ahead of becoming ‘deemed domiciled’ and this article explores some of the options.

What is Domicile?

To begin with, "domicile” holds a distinct meaning in UK law compared to ordinary English. Other jurisdictions may use similar terms to describe residence in a tax year or at a particular time. An individual’s domicile under UK law is broadly where their permanent or habitual home is and where they intend to live indefinitely. You can only have one domicile at any given time in a single legal jurisdiction.

At a very high level, there are three categories of domicile:                                                                    

  1. Domicile of origin

At birth, an individual inherits a domicile of origin from their father. If the parents were not married or the mother was widowed, the child will take domicile from the mother.                                                        

  1. Domicile of choice

This can only be acquired where an individual is both resident within a territory under general law and intends to reside there indefinitely.                                                                                                                                          

  1. Domicile of dependence

This occurs where the law attributes a domicile to an individual who either lacks legal capacity or is legally dependent upon someone else. A minor child may acquire a domicile of dependence on adoption or because their parent or guardian adopts a new domicile of choice.          

What makes an individual UK ‘deemed domiciled’?

Legislation introduced in 2017 meant that previously non-UK domiciled individuals are now treated as UK ‘deemed domiciled’ under the following circumstances.

Deemed domiciled for income tax and CGT purposes

An individual may be treated as deemed domiciled in the UK under the following categories:

  • Category A (returning UK domiciliary) - the individual was born in the UK and had a UK Domicile of origin and is UK resident in the tax year.
  • Category B (long term resident) - the individual has been UK resident for at least 15 out of the previous 20 tax years.

Deemed domiciled for Inheritance tax (IHT) purposes

The rules determining whether an individual is deemed domiciled for IHT purposes are different and a person could be treated as deemed domiciled if the following scenarios apply:

  • Scenario 1 - UK domiciled under general law at any time in the previous three tax years.
  • Scenario 2 - For Category A individuals the same rules shall apply for IHT, the only exception being that they will be treated as deemed domicile from the start of the second tax year of residence.
  • Scenario 3 - For Category B individuals who are non-UK domiciled under general law but deemed domiciled under the 15-year test, they could lose the deemed domicile status if they are non-resident for three complete tax years.

Tax consequences of becoming deemed domiciled

Becoming deemed domiciled has significant tax implications, including:

  • Liable to UK tax on worldwide income and gains

By becoming deemed domiciled an individual would be subject to income tax and capital gain tax (CGT) on their worldwide income and gains. The key consequence on becoming deemed domiciled is that the remittance basis ceases to exist and there is no longer the scope to defer or avoid a charge to tax on income and gains.

  • Liable to UK inheritance tax on worldwide assets

For IHT purposes, by becoming UK deemed domiciled, personally held non-UK situs assets cease to be excluded property (assets outside the charge to UK IHT). Such assets are therefore brought into the UK IHT net and could be exposed to IHT on death.

Tax planning before becoming deemed domiciled

Here are some points to consider before undertaking tax planning:

  1. For Category B individuals – assess whether you have acquired a UK domicile of choice.
  2. For Category A individuals - evaluate if you have actually acquired a domicile of choice in another country or is your UK domicile of origin still intact.
  3. The date in which an individual becomes UK deemed domiciled, particularly for Category B individuals (i.e., how many tax years in the preceding 20, were years of UK residence). This is necessary if tax years of UK residence have been miscounted, deemed domicile may arise sooner than expected, and indeed may have arisen already.
  4. If the individual is willing to leave the UK to avoid becoming deemed domiciled.

For 1. and 2. above, if an individual wishes to gift non-UK assets to trusts and, if such gifts are made by a UK domiciliary, the normal result is an IHT liability of 25% of the value of the assets.

Tax planning opportunities  

The planning for Category A and Category B individuals can be different and therefore this needs to be considered.

Planning for Category A and Category B individuals

  • Remittance planning

For former remittance basis users, the remittance rules apply even after a person becomes deemed domiciled. Therefore, the first objective is to identify which funds can be used in the UK (i.e., clean capital) and how can these funds be protected from becoming a mixed fund in the future.

The second part is to establish which funds are taxable if brought to the UK and if they should be earmarked to be used abroad only. If such funding is currently held within some kind of vehicle (i.e., company or non-resident trust), consider what options are available.

Following on from the point above, another option is to accelerate foreign income and gains during the year in which the remittance basis applies.

  • Gifting offshore assets

If an individual is UK domiciled or deemed domiciled, gifts of offshore assets may be subject to IHT at the point in which the gift is made and / or within 7 years if the donor dies. However, this can be avoided if the gifts are made before the individual becomes deemed domiciled.

There are certain anti avoidance rules that need to be considered and potentially CGT may arise, however, they can be navigated around.

Planning for Category B individuals only – Excluded Property Trust (EPT)

The key planning tool here for Category B individuals is that they can create an excluded property trust prior to becoming deemed domiciled. Unfortunately, for Category A individuals who were born in the UK and had a UK domicile of origin at birth, this planning option is not available.

The key benefits of an EPT are:

  • IHT mitigation

IHT protection can be obtained in relation to foreign assets transferred into trust before becoming deemed domiciled. This is available even if the settlor later becomes UK-domiciled or deemed domiciled.

By enveloping within a foreign company, the protection can extend to most UK assets, although this does not include close companies whose value is attributable to underlying UK residential property. However, indirectly held UK situs investments may give rise to UK source income, which may create income tax exposure for the settlor, and their acquisition may give rise to a remittance. As a rule, it is therefore unattractive for such assets to be held, even if they can be held indirectly so that IHT inefficiency is avoided.

  • Income tax and CGT protection

A further attraction is the availability of income tax protection for foreign income that is retained in the trust. This is so long as the settlor does not acquire a UK domicile of choice and is not considered to be UK deemed domiciled under Category A. CGT protection is available on the same basis. 

It is widely considered to have been introduced to soften the blow that was dealt by the introduction of those deemed domicile rules in 2017.

  • Negating the remittance basis charge

Once seven tax years of residence have elapsed, a UK resident foreign domiciliary must normally pay a remittance basis charge (£30,000 or £60,000) for every year in which the remittance basis is used to protect income and gains generated by foreign investments from UK taxation. This is up until the tax year in which they become UK deemed domiciled (under 15 out 20-year rule) at which they will be taxed on the arising basis. The icing on the cake is by transferring all the investments into trust, there may no longer be a requirement to claim the remittance basis and pay the annual charges.

How can we help?

Domicile is a complex area and to determine a person’s domicile can be challenging, but becoming deemed domiciled under Category A or B could have a significant impact on an individual’s UK tax affairs.

Ideally the planning process should usually commence at least 12 – 18 months before becoming deemed domiciled, however given the current political landscape it would be advisable to do this urgently. The next general election is to be held by January 2025 at the latest and it is widely expected both sides could restrict the tax benefits for non-domiciled individuals further.

If you need help in these areas, please contact our Tax Director, Shaharan Deen (