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What Is Non-Domicile And How Does It Affect Inheritance Tax?

What Is Non-Domicile And How Does It Affect Inheritance Tax?

‘Non-doms’ hit the headlines when it was revealed that the wife of Rishi Sunak, Chancellor of the Exchequer, held non-domicile status. Domicile is a concept of common law and is based on fact and intention. A person is generally domiciled in the country where they have their permanent home and has implications for tax, amongst other things. It is possible to live in one country for years but be domiciled elsewhere. 

What is a non-dom and what difference does it make for tax purposes?

Domicile status–broadly where an individual has their permanent home–impacts tax. ‘Non-doms’, or non-UK-domiciled individuals, have the option to be taxed only on their UK source income and capital gains, plus any non-UK income/gains remitted to the UK. This is called the remittance basis of taxation. 

Domicile also impacts an individual’s exposure to UK inheritance tax (IHT). A non-dom is only subject to UK IHT on their UK assets. UK domiciles are subject to UK IHT on their worldwide assets, subject to the availability of any exemptions or reliefs.
Rule changes and the recent bad press around the subject have only made it more imperative to consider your domicile position and plan carefully. 

What is “deemed domicile” and how does it impact IHT?

The number of people claiming non-dom status has been declining since 2017 when HMRC introduced the concept of “deemed domicile”. These rules serve to treat an individual as domiciled in the UK for all taxes once they have been resident in the UK for 15 out of the previous 20 years, regardless of their actual domicile status under common law.

Becoming deemed domicile in the UK will significantly alter a non-doms exposure to UK IHT, bringing their overseas assets into the scope of IHT and subject to 40% tax on death.

Non-doms who are nearing their deemed domiciled ‘deadline’ should consider what steps could be taken now to help mitigate their exposure to UK IHT. This might include gifts, the use of trusts, or leaving the UK for a period of time.

The future for non-doms 

Under political pressure, Rishi Sunak’s wife, Akshata Murty, has publicly confirmed she will not claim the remittance basis going forward. 

The Labour party has announced its intention to abolish non-dom tax status should they get into power, which would have a significant impact on the UK tax position of non-doms. The Conservative government may also feel the pressure to make similar changes. 
With this uncertainty, it would be wise for non-doms to review their affairs and consider undertaking any planning now. This is a very complex area and, coupled with increasing scrutiny around the taxation of non-doms, means taking professional advice is crucial.

Getting the right advice

If you would like to know more about how we can help you with your domicile position, including minimising your UK inheritance tax exposure, please get in touch. You may also be interested in our series of blogs relating to Inheritance Tax.

What You Need To Know About Inheritance Tax Rates And Thresholds
How To Avoid Extra Inheritance Tax When You’ve Been Left A Legacy
Getting Your Life In Order To Make Your Death Easier For Your Loved Ones