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Understanding UK taxation and domicile

There’s very little about tax that makes sense to the layman. In fact, such is the rate of change and the vast complexities involved, it’s no wonder that tax experts are able to command expensive fees in order to support businesses and individuals in processing their returns. One area that can prove particularly difficult to understand relates to domicile and UK taxation and how different statuses can impact income tax, capital gains tax, and inheritance tax.

The starting point for any discussion around such issues, of course, should focus on knowing the various domicile statuses currently available and which category you fall into.

Domicile status 

Under regular UK law, there are three domicile statuses for individuals; but for UK tax purposes there are in fact four. These are domicile of origin, domicile of dependency, domicile of choice, and deemed domicile (the category applicable to UK tax only).

The first of these – domicile of origin – is the most common form attributed to an individual, with the status assigned at the time of birth, based on parentage (the father’s domicile for married parents, the mother’s for unmarried parents). Similarly, domicile of dependency applies to UK-born individuals aged under 16 who have emigrated to a new country on a permanent basis and who take on the domicile of their parents, should they themselves adopt a change.

Domicile of choice, meanwhile, represents those aged over 16 that consider a domicile to be ‘home’ regardless of the current nation in which they live. It can be difficult to change domicile from one nation to another, with the need to demonstrate to HMRC that there is both a physical presence in the country concerned as well as an intention to remain indefinitely.

The final domicile status is deemed domicile, which applies to those individuals born in the UK with a domicile of origin and resident in the UK for the relevant tax year, and who have been resident in the UK for at least 15 of the preceding tax years.

The impact on UK tax

Domicile status has an effect on individuals’ tax obligations, particularly those not classed as a UK domicile and those which fall into the deemed domicile category. In such cases, income tax and capital gains tax will be calculated on the basis of standard rates, but the taxpayer will also be given the option for any foreign income or capital gains to be taxed at the point at which it’s brought into the UK – a policy known as the ‘remittance basis’.

This remittance basis can be claimed with no charge for the first seven years of residence in the country, followed by an annual charge thereafter. This level varies depending on the duration an individual has been resident in the country, so speaking to an expert advisor to understand any potential obligations is essential.

It is also worth noting that, for inheritance tax, those domiciled in the UK are subject to tax on their worldwide assets, yet non-UK domiciles will be taxed on their UK assets only.

You can find out more about domicile and UK taxation by getting in touch with the tax experts at Charter Tax today, so ensure you speak to an experienced tax accountant in order to fully understand your obligations.

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