Domicile – why it’s so important for UK tax

Domicile has always been an important topic for those with both UK and overseas connections, particularly given that it determines how much UK tax you’ll face.

In 2022 it was revealed that Rishi Sunak’s wife, Akshata Murty, whose share earnings top over £11 million a year, had not been paying UK tax. Is it appropriate that someone earning that amount while living in the UK doesn’t pay UK tax? The somewhat surprising answer is yes, as the practice sits within the current tax rules.

What is it and how is it determined?

In 1858 Lord Cranworth stated in a court case that: “By domicile we mean home, the permanent home.” In another court case in 1904 it was noted: “A person may be said to have his home in a country if he resides in it without any intention of, at present removing from it permanently or for an indefinite period.”

Note how old these cases are. The concept has been built through case law over time; in fact, the definition of domicile has not been reflected in legislation at all. As a result this can make the decision about domicile status quite tricky – some situations even require references to legal precedents.

However, in very general terms, if you were born in the UK to parents born in the UK and you have always lived in the UK you’re likely to have a UK domicile status. Again, generally, if you were born outside of the UK to parents born outside of the UK and you have never lived in the UK you are likely to be non-UK domiciled. If your circumstances fall anywhere between those two scenarios your domicile status may not be clear and you’re likely to need specialist advice to help you work out what your UK domicile status is.

The different types

There are four different types to consider; a domicile of origin, a domicile of dependency, a domicile of choice and deemed domicile. Each of those four different domiciles has its own complex rules and a specialist will help you understand which applies. From this you can understand in which country you will be considered to be domiciled by the UK tax authorities.

Why is domicile status important?

Simply put, your domicile status determines how much UK tax you pay. If you are not UK domiciled but are UK tax resident you will be charged UK tax on your UK income and gains. However, your overseas income and gains can be excluded from UK tax as long as various conditions are met. If you are UK domiciled and UK tax resident you’ll be taxed on your worldwide income and gains, without the possibility of sheltering overseas income and gains from UK taxation.

Finally, and most compellingly, those with a non-UK domicile, generally, only face a possible 40% UK Inheritance Tax (IHT) charge on their UK assets. Any overseas assets won’t attract any IHT at all. On the flip side, those with UK domicile will face that 40% charge of IHT on any worldwide assets – even if they no longer live in the UK.

For more information and support, please contact your nearest office.