Introduction

This section addresses the opportunities to reduce or eliminate liability to United Kingdom taxation which arise when a foreign person (whose tax status is referred to as a Non-UK Domicile) comes to live (or already lives) in the United Kingdom.

It has often been said (see here) that Non-UK Domiciles get a much better tax deal than UK Domiciles. This is true because the UK wishes to attract wealthy foreigners who do not wish to pay UK taxes.

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What is Domicile

Domicile is a general law concept that has been adopted by tax law. Broadly speaking you are domiciled in the Country where you have your permanent home. You can only have one domicile at any given time.

Rules on determining domicile can be summarised as follows:

(i) When you are born you acquire a domicile of origin. This is the domicile of your father (this will NOT necessarily be you were born). If born illegitimately then you acquire the domicile of your mother.

(ii) On attaining the age of 16 it is possible for you to lose your domicile of origin and acquire a domicile of choice. You may retain your domicile of choice indefinitely. You may acquire a new domicile of choice.

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Avoiding the Acquisition of a United Kingdom Domicile of Choice

The concern of the foreign domiciliary should be to avoid acquiring a domicile of choice in the United Kingdom.

In simple terms, in order to acquire a United Kingdom domicile of choice, the individual (in addition to residing in the UK) must also have decided to live in the UK permanently/indefinitely and NOT to live anywhere else. This is an extremely difficult thing for the Inland Revenue to prove. For example, why would anyone make such a commitment; nowadays with the global workplace being bigger and more accessible not even UK Domiciles are likely to commit themselves to such a statement.

Take the following cases that have been decided in the UK Courts:

(a) In IRC v Bullock [1976] STC 409 the taxpayer resided in England for 40 years but he always hoped to return to his home of Nova Scotia should he survive his wife or persuade her to return to Nova Scotia. The Court decided that the taxpayer had NOT acquired a UK domicile of choice. In this case the Judge commented on an earlier case as follows:

"A domicile of choice is acquired when a man fixes voluntarily his sole or chief residence in a particular place with an intention of continuing to reside there for an unlimited time".

The Judge went on to expand the above statement as follows:

"I accept that statement... with this qualification only that the expression "unlimited time" requires some further definition. A man might remove to another country because he had obtained employment there without knowing how long that employment would continue but without intending to reside there after he ceased to be employed. His prospective residence in a foreign country would be indefinite but would not be unlimited in the relevant sense".

(b) In Buswell v IRC [1974] STC 266 Mr Buswell, despite residing in the United Kingdom for periods totalling nearly 30 years, the Court decided that the taxpayer had NOT acquired a UK domicile of choice.

Other factors that have been decisive in the Court deciding that the taxpayer had NOT acquired a UK domicile of choice.

Tax:

(i) if a person moves from a high taxed country to the UK intending to return home when the tax regime is more favourable he is unlikely to acquire a domicile of choice in the UK.

(ii) if an person intended to remain in the UK only so long as UK tax law remains favourable to foreign domiciliaries, it is unlikely that he would acquire a domicile of choice in the UK.

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Retaining a Foreign Domicile while Resident in the United Kingdom

An individual coming to the UK and wishing to retain his foreign domicile in order to retain tax advantages may live in the United Kingdom as long as he wishes but he should not form the intention to settle here permanently. He should also take steps to demonstrate this intention:

(i) To leave the UK in due course. The individual should, if possible, retain ties with his country of origin, for example, by regular visits home, business interests, bank accounts, membership of social, political and religious groups, take out a will under local law, request to be buried in "home" country.

(ii) NOT to reside indefinitely in the UK by minimising commitments in the United Kingdom. Purchase of a house is OK. Avoid getting involved in UK politics, and/or social and religious organisations that would conflict with your home country beliefs.

Ultimately the onus is on the Inland Revenue to prove that you intended to stay in the UK and NOT on you to prove that you were going to return home. Therefore the above pointers are useful but not absolutely necessary.

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The Tax Rules

In simple terms Non-UK Domiciles do NOT pay tax on income retained overseas unless they bring it into the UK. This is referred to as the remittance basis of taxation.(This is much more favourable than the tax rules for UK domiciles who are taxed on worldwide income whether or not they bring it into the UK)

The rules for determining what is/is not taxable under the remittance basis are extremely complicated and often confusing. The following is a summary of the remittance rules including some tax planning hints on how to get access to monies abroad without it being taxed in the UK

(i) Income earned/accrued before moving to the UK

Income earned/accrued before moving to the UK and subsequently remitted to the UK is NOT taxable in the UK.

(ii) Purchase of Assets abroad (for example, cars, valuable collectables) with foreign income

Purchase of assets abroad (cars, valuable collectables) with foreign income and brought into the UK are NOT taxable in the UK. There is no taxable remittance because the asset received is not "money" (or equivalent to money).

This is confirmed by the Inland Revenue - the Inspector's Manual reads:

(ii)(i) Paragraph 1564. "... the mere transfer to the United Kingdom of such investments or assets [cars etc] other than commercially recognisable forms of money does not constitute 'sums received'."

(ii)(ii) Paragraph 1569. "If an overseas credit card is used abroad and the account is settled direct to the card company out of overseas income, no liability to United Kingdom tax will arise. But if an asset purchased using the card is brought to the United Kingdom and subsequently sold here, there will be a taxable remittance, at the date of disposal, up to the amount of any income used to settle the original account."

(iii) Spending money when abroad

Similarly to (ii) above, foreign money can be used to to pay for any expense incurred whilst abroad i.e. on holiday or business and will NOT be taxable in the UK. Similarly you could also use an overseas credit card. The Inspector's Manual provides: "If an overseas credit card is used abroad and the account is settled direct to the card company out of overseas income, no liability to United Kingdom tax will arise. But if an asset purchased using the card is brought to the United Kingdom and subsequently sold here, there will be a taxable remittance, at the date of disposal, up to the amount of income used to settle the original account."

(iv) Gifts/Loans to Third Parties Completed Abroad

If a Non-UK Domiciliary wishes to make gifts/loans ("gifts") to UK residents (spouse, other relatives and/or friends) he can do so out of his foreign income without him or the recipient incurring any UK tax liability. It is only necessary to arrange for the sums of income to be received by the recipient abroad i.e. paid into the recipients foreign bank account. The recipient can subsequently bring the gift into the UK without any tax consequences. It is important to note that the Non-UK Domiciliary making the gift cannot benefit from it i.e. if the gift is to his wife then she cannot use the gift to pay his "bills" such as a loan on the car or joint mortgage payments.

The Inland Revenue Inspector's Manual (paragraph 1565) states: "It may be claimed that income arising abroad has been alienated from the taxpayer's possession by gift abroad (for example, to a relative) so that it is no longer his income when received in the United Kingdom. This may be challenged on the grounds that the gift was not completed until the income was received in the United Kingdom or that financial consideration for the 'gift' has been received in the United Kingdom. Before any such claim is accepted, a full report should be made to International Division.

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