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Non-domicile status considerations

As a result of the pandemic, working remotely has become the new normal for many and for others a hybrid working scheme has been implemented by their employers. These working changes have given rise to a dream to both live and work abroad. The pandemic isn’t the only factor influencing this dream, growing concern about tax increases in the UK has just yet another reason why individuals are looking to pack up and head to warmer, more tax efficient climate.

The rise in flexible working as a result of COVID-19 has meant that many people are no longer tied to a particular work location. Priorities have changed for many, with a wish to be closer to friends and family, spend more time enjoying green space or lead an improved quality of life, all of which are additional factors in turning people’s thoughts to the idea of living and working abroad.

As the Chancellor explores ways to pay for the pandemic, there may be an increase in people seeking to become non-resident or even non-domiciled. As well as the rate of Corporation Tax increasing to 25 per cent from 1 April 2023, the Office for Tax Simplification published its review into Capital Gains Tax (CGT) in November 2020. This report recommended that CGT rates were brought into line with Income Tax and that the CGT allowance should also be reduced, while potentially increasing the number of people required to pay Inheritance Tax (IHT). Changes such as this are yet to be implemented; however, they appear to remain firmly on the agenda.

Although switching to a new tax jurisdiction could mean that some individuals enjoy both the better weather as well as achieving an improved tax efficiency, there are a couple of important considerations that they need to think about to ensure that their transition in status goes smoothly.

TAX DIFFERENCES

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First of all, it’s important to understand the difference between “non-residence” and “non-domicile”, as they both have very different implications when looking at a personal tax viewpoint. Although a person’s residency is considered to be the country in which they live in and pay tax year upon year, they will remain UK domiciled unless they have entirely cut ties with the UK. A person who is domiciled and living in the UK, is subject to UK tax on their international income and gains on an arising basis. An individual’s domicile also has consequences for their exposure to UK Inheritance Tax, as the international assets of UK-domiciled people are subject to UK inheritance tax.

CHANGING STATUS

The procedure of requesting an alteration in a domicile status fundamentally comprises the individual affirming that they have acquired a residence of choice elsewhere and firm evidence would be imperative to substantiate this allegation. Their status could be given to HMRC on their individual tax return, where this is applicable, yet the struggle lies in that the domicile is usually not investigated until an individual is deceased and their Estate has been reported to HMRC; it then rests with HMRC to contest and examine rights for non-domicile.

Evidence of acquiring a domicile of choice outside the UK should encompass frequently recording their upcoming plans and following up on those intentions – ultimately, they  should be able to demonstrate that they intend to leave the UK and not return. The  person  looking to lose their UK domicile will also need to show strong  associations to their new jurisdiction, together with a cutting of ties with the United Kingdom. A declaration signifying their purpose and the subsequent steps taken can be priceless in providing the required evidence to HMRC in years to come – possibly for the family when defending the tax position taken by their late relative in respect of legacies left behind. It must be distinguished that  returning to the United Kingdom for a previously domiciled individual will reignite their UK domicile of origin with subsequent tax  implications for income, capital gains, and inheritance tax. 

SEEKING ADVICE

Individuals looking for a new tax jurisdiction should pursue help from an adviser early in the process, and before moving abroad. The advisor could provide support around how best to structure their earnings, investments, and pension provision. Other intricate aspects may include circumstances whereby an individual is tax resident in two separate jurisdictions for a period, and consequently they will need to pursue clarity on how to state their situation to the jurisdictions in question. They may also need support in conforming with local tax legislation or, for example, setting up payroll abroad.

Additional considerations may involve applying for the correct visas, overcoming language barriers, and making living and family arrangements. Often, individuals may decide to move overseas at an important milestone in their professional life, for example, at the time of a noteworthy business deal. As such, getting the timing of their move just right, can make a huge difference to realising optimal value from the transaction.

The improved flexibility enabled by remote working has meant that now is an ideal time to move the virtual workplace to sunnier, more tax-efficient locations. By seeking the right advice from local specialists and timing the move sensibly, people can enjoy all the benefits of being non-domiciled or non-UK residents, while avoiding potential tax implications.

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