Deemed domiciled status: Who’s caught and what’s the effect?

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Malcolm Finney looks at deemed domiciled status following changes introduced in F(No 2)A 2017.

Prior to changes introduced in F(No 2)A 2017, it was not possible for an individual to be categorised as deemed domiciled for income tax or capital gains tax (CGT) purposes, albeit an individual could be so categorised for inheritance tax (IHT) purposes. 

From 6 April 2017 (under ITA 2007, s 835BA), deemed domicile status applies for both income tax and CGT purposes.

UK domicile of origin and born in the UK

For present purposes the aspect of the new rules of particular interest is that which applies to individuals who were born with a UK domicile of origin and who have acquired a non-UK domicile of choice for example by residing overseas with an intention to remain overseas, sometimes referred to as ‘returners’. 

However, having been born with a UK domicile of origin is not of itself sufficient to trigger deemed domicile status whether for IHT or income tax and CGT. For IHT purposes, deemed domicile status arises for a tax year where an individual was born in the UK with a UK domicile of origin, is resident in the UK for the tax year and was also resident for at least one of the two tax years immediately preceding that tax year. Thus, an individual possessing a UK domicile of origin will not fall foul of the ‘new’ provision if simply born outside the UK.

The equivalent provisions for income tax and CGT require that an individual is born in the UK with a UK domicile of origin as applies for IHT but is merely resident in the UK for the tax year. There is thus no requirement for the individual to have also been resident for at least one of the two tax years immediately preceding that tax year. Nevertheless, as for IHT, a child possessing a UK domicile of origin will not fall foul of these new provisions if born outside the UK.

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IHT vs income tax and CGT 

It may be observed that the IHT provision in essence allows for a grace period of residence not available for income tax and CGT. 

That is to say that an individual possessing a UK domicile of origin and who was born in the UK may re-acquire residence in the UK, for example in 2019/20, but will not be deemed domiciled for that tax year if the individual was not resident in either of the two preceding tax years, in this case 2017/18 and 2018/19. But such individual would be deemed domiciled for income tax and CGT for that tax year of residence. 

Consequences

There are a number of consequences of falling to be treated as deemed domiciled for IHT purposes for a tax year. These include the bringing into charge of an individual’s worldwide assets (not just UK situs assets), loss of ‘excluded property’ status for foreign assets comprised in any non-UK resident trusts; and an inability to set up excluded property trusts.

Similarly, there are a number of consequences of falling to be treated as deemed domiciled for income tax and CGT purposes for a tax year. The main consequence is that the remittance basis will no longer be available to the individual with respect to non-UK situs assets and non-UK sourced income.

In view of the significant impact of the new provisions transitional reliefs are available but are somewhat complex.

Practical point

Returns to the UK by those UK domiciled individuals residing abroad should be carried out in such manner that UK residence is not re-acquired. Where this is not feasible planning needs to be undertaken before, not after, arriving in the UK.