What is a Tax Domicile?

James
Jun 22
8 min read

Updated: Jun 23

In this article, we will explore the concept of tax domicile in the UK and the tax rules that came into effect after 5 April 2025.

Tax domicile is a legal term that applies to individuals and determines the taxation of those permanently resident in a country. This status is defined by a country’s legislation to regulate the taxation of income received.

Non-Domiciled Persons in the UK: Key Changes and Implications

With the UK government’s shift away from the concept of domicile, significant changes have been introduced for non-domiciled persons (non-doms) resident in the UK. The recent Budget announcement confirmed new measures that alter the taxation of foreign income and capital gains, as well as inheritance tax and other aspects of tax compliance. This article examines the key changes, the new rules for non-doms, and their implications for individuals considering a temporary stay in the UK or those already resident.

The Move from Domicile to Residence-Based Taxation

The transition from domicile to a residence-based taxation system marks a significant change in how the UK assesses individuals’ tax liabilities. Previously, domicile status influenced income and capital gains tax. Now, the government is adopting a regime focused on residency, presenting both opportunities and challenges for non-doms.

New Regime for Foreign Income and Capital Gains (FIG)

Overview of the FIG Regime

From 6 April 2025, the existing regime will be replaced by a new Foreign Income and Gains (FIG) regime designed for non-doms. Under this regime:

• Four-Year Exemption: New UK residents, and those who become resident after ten years of living abroad, will be exempt from tax on foreign income and capital gains for the first four years of UK residence. This creates favorable conditions for those planning short-term stays in the UK.

• Tax-Free Remittance: For the first four years, individuals can bring foreign income and capital gains (FIG) into the UK without incurring additional tax, offering greater flexibility than the previous system.

Reporting Requirements and Administrative Burden

While the four-year exemption is attractive, the application process involves significant administrative requirements. Taxpayers must report their worldwide income and apply for a reduction in net income from qualifying foreign income and capital gains (FIG). This results in increased reporting obligations and additional costs for tax return preparation. Additionally, opting for the FIG regime will disqualify individuals from the personal income tax allowance and the annual capital gains tax exemption for that year.

Transitional Rules

Individuals who have been UK residents for more than four years before 6 April 2025 will not benefit from the new FIG regime. Their existing income and capital gains will remain subject to the original rules until the FIG regime takes effect.

Other Key Changes

Several additional conditions complicate the new FIG regime:

• Business losses incurred wholly outside the UK in the year of an FIG claim cannot be offset against tax liabilities in that or future tax years.

• Claiming FIG results in the loss of the personal income tax allowance and/or the annual capital gains tax exemption.

• FIG claims are excluded from the calculation of adjusted net income, which affects allowable pension contributions. Non-qualifying FIG amounts will still be included in this calculation.

• Certain types of foreign income, such as income from entertainment or sporting activities (whether conducted in the UK or abroad), are excluded from FIG eligibility.

• Gains from sales to “property-rich companies” are not counted as FIG gains and remain taxable.

• Taxpayers lose the ability to utilize foreign capital losses in tax years when an FIG claim is made.

Changes to Relief for Overseas Workdays (OWR)

Now referred to in draft legislation as “Foreign Employment Choice,” Relief for Overseas Workdays will be extended for an additional four years. However, it will be limited to at least 30% of the worker’s total income or £300,000 annually.

Workers no longer need to keep the foreign portion of their income outside the UK to qualify for the relief.

Transitional rules for OWR account for individuals who moved to the UK intending to utilize the benefit in their first three years, even if they were not resident abroad for the required ten years. These individuals may also qualify for OWR.

Introduction of the Temporary Repatriation Facility (TRF)

The legislation introduces a Temporary Repatriation Facility (TRF), allowing taxpayers who have used the remittance basis for at least one year to bring previously untaxed income and capital gains into the UK at a reduced tax rate.

Taxpayers can “designate” funds in accounts and pay tax at a rate of 12% for the tax years 2025/26 and 2026/27, and 15% for 2027/28. This facility allows taxpayers and their advisers until 31 January 2028 to identify funds suitable for designation and benefit from the reduced tax rate.

When transferring funds, only those designated for the current tax year are considered. Designated funds remaining outside the UK can be transferred later without additional tax, with the TRF tax rate applied to the year of designation.

The draft legislation offers flexibility in identifying designated funds, allowing prioritization over other income and gains during transfer. Designation is possible even without a complete breakdown of the account’s funds, potentially leading to significant tax savings. However, foreign tax credits may reduce these benefits. Key advantages include certainty in filing returns and reduced time to identify qualifying funds.

Capital Gains Tax Recalculation

Under the new regime, individuals who previously used the remittance basis can recalculate foreign assets at their market value as of 5 April 2017, provided they are not deemed UK-domiciled by 5 April 2025. The rationale for choosing 2017 is unclear, but it may provide relief for those transitioning to the new regime.

The recalculation election introduced in 2017 remains available for eligible individuals, and the 2008 recalculation provisions for trusts will also continue to apply.

Implications for Inheritance Tax (IHT)

As anticipated, domicile will play a diminished role in determining Inheritance Tax (IHT) liability under the new rules.

The taxation of non-UK assets for IHT will depend on whether an individual has been UK resident for at least 10 of the 20 tax years immediately preceding the taxable event (e.g., death).

To address concerns about abrupt transitions, a step-down approach applies for those resident in the UK for 10 to 19 years:

• Those resident for 10 to 13 years will remain subject to IHT for an additional three years.

• For each year of residence beyond 13, the period of IHT liability increases by one year. For example, an individual resident for 15 of the past 20 years who leaves the UK will remain subject to IHT for five years, while one resident for 17 years will remain liable for seven years.

Once an individual has been non-resident for 10 years, the test period resets. Individuals deemed domiciled under the current rules who leave the UK and become non-resident in the 2025/26 tax year will revert to non-domiciled status after four years of non-residence.

For individuals aged 20 and under, IHT liability depends on whether they have been UK resident for at least 50% of the tax years since birth.

The new rules simplify the process for British expatriates concerned about severing UK ties to lose their UK domicile. Under the new system, they need only remain non-resident for ten years to change their status.

Gifts made before the new rules were introduced remain largely unaffected. IHT on personal property assets at death will consider gifts made within seven years prior. Donations of excluded property remain exempt from IHT, even if the individual becomes a long-term UK resident before death (when their non-UK assets cease to be excluded property).

Similarly, a donation that was not excluded property at the time of transfer will be subject to IHT if the transferor dies within seven years, regardless of their residency status.

From 6 April 2025, the process for selecting a deemed domicile for IHT purposes will be revised. A spouse or civil partner of a long-term resident who is not themselves a long-term resident can elect to be treated as one. This avoids tax consequences on transfers to a non-long-term-resident spouse and applies until 10 consecutive tax years of non-residency have passed.

The FOTRA (Foreign-Owned Taxable Assets) rule will continue to apply.

While domicile is less critical for IHT, it remains relevant for inheritance planning and the application of double tax treaties.

Remittance Basis Taxation

If you are a UK resident, your worldwide income is typically taxed, even if it has already been taxed in its country of origin. In cases where a double tax treaty exists, you may receive a credit for taxes paid abroad against UK tax liabilities, or taxes paid in the UK may offset taxes owed elsewhere. These treaties, which often follow the Organisation for Economic Co-operation and Development (OECD) protocol, aim to prevent double taxation by ensuring income is taxed in only one country or by offsetting taxes paid.

Non-domiciled UK residents can opt for the remittance basis, taxing only UK-sourced income and income or gains brought (remitted) into the UK. This means that income and gains held abroad are not subject to UK tax unless remitted.

However, choosing the remittance basis has trade-offs. For the 2023/24 tax year, it results in the loss of the personal allowance (£12,570) and, if applicable, the annual capital gains tax exemption.

Additionally:

• Individuals resident for 7 of the last 9 years must pay an annual charge of £30,000.

• Those resident for 12 of the last 14 years pay £60,000 annually.

• From 5 April 2017, individuals resident for 15 of the last 20 years are deemed UK-domiciled for all tax purposes, regardless of their legal domicile status.

The remittance basis charge can be paid from worldwide income without being considered a remittance, provided it is paid directly to HMRC. Specific rules apply to ensure compliance.

The remittance charge is treated as a partial advance payment of tax on worldwide income. Taxpayers must nominate income each year to which the charge applies, but this income must not be remitted to the UK before other worldwide income, or additional tax liabilities may arise. Only £1 of nominated income is required annually, but it must be earned in that year and exceed £1. The charge can be treated as tax paid in the UK, allowing taxpayers to nominate sufficient income to benefit from double tax treaties in other countries.

Deemed Domicile

From 5 April 2017, individuals resident in the UK for 15 of the last 20 tax years are automatically deemed UK-domiciled for all tax purposes. From the 16th tax year, they can no longer use the remittance basis, and their worldwide income and capital gains are taxed under UK law as they arise. UK inheritance tax will also apply to their worldwide estate, not just UK-based assets.

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Briefly on the Article

What is Domicile in the UK?

A person is considered domiciled in the UK if they “belong” to the UK and it is their permanent home.

This is typically established through the residence of the person’s parents (usually the father) at the time of birth, known as “domicile of origin,” or by choosing the UK as their permanent home and relinquishing ties to their native country.

What is the Principle of Domicile?

The law of domicile governs matters related to the inheritance of movable property: “Inheritance relations are determined by the law of the country where the testator had their last place of residence” (Article 1224, Paragraph 1 of the Civil Code).

What is the Law of Domicile?

(Lex domicilii - law of domicile). At birth, a person’s domicile is typically that of their parents, which can later be changed voluntarily or due to life circumstances.