When individuals are thinking of returning to live in the UK, there are a number of important matters they should consider before they move back to the UK.
This article focuses on Formerly Domiciled Residents (FDRs), who are non-UK domiciled under general law, but are deemed to be domiciled in the UK for taxation purposes.
Formerly Domiciled Residents and Liability to UK Tax
Anyone born in the UK with a UK domicile of origin will always be an FDR if they resume residence in the UK, irrespective of how many years they have lived abroad or whether they have any connections to the UK.
These individuals will pay UK tax on their worldwide income and capital gains, on the same basis as taxpayers who are UK domiciled under general law. Any potential tax advantages which might have been obtained by these individuals, by reason of their UK non-domiciled status, are therefore removed.
Who is a FDR?
A formerly domiciled resident (FDR), is a non-UK domiciled individual who:
- Was born in the UK; and/or
- Has a UK domicile of origin; and
- Is UK resident for the tax year.
Deemed UK domicile is triggered on 6 April in a tax year of UK residence,even if this year is a ‘split’ year under the statutory residence test (SRT).
An individual normally acquires a domicile of origin from their father at birth, or from their mother, if the parents were not married. This is not necessarily the country in which that individual was born.
If an individual does not meet any of the automatic overseas tests but does meet one of the automatic UK tests, or the sufficient ties test, they will be considered a UK resident.
UK Inheritance Tax and Trusts
Assuming an individual meets the above FDR criteria and was resident in the UK in at least one of the two previous tax years, prior to the year in which any Inheritance Tax (IHT) charge arises, property settled into a trust, when they were not domiciled in the UK, cannot be excluded for the purposes of IHT.
This could have severe consequences with the Trust falling into the ‘Ten Yearly and Exit Charge Regime’. If the Settlor (or his spouse or civil partner) has retained a benefit, the ‘Gift with Reservation of Benefit’ provisions will apply, and a charge to tax on the death of the Settlor will be imposed. Please speak to Dixcart UK, if you would like more details regarding either potential consequence.
It is also important to seek professional advice to understand how specific individuals and clients might be affected and any action that might need to be taken before individuals become UK resident.
An individual’s domicile status is a fundamental factor in determining his/her liability to UK tax. It also has implications for other branches of the law.
UK Non-domiciled Individuals and Planning
Careful planning and consideration must be taken in order to take advantage of potential tax exemptions, reliefs and protection from inheritance tax which can be obtained by UK non-domiciled individuals.
Due to HMRC’s increased investigations into the tax affairs of UK non-domiciled individuals, a robust defence should be prepared, in the event of any challenge from HMRC. Professionals at Dixcart UK can help you prepare a ‘domicile review’, to provide evidence of your intentions, supported by the facts. This can be particularly useful in situations where enquiries are opened by HMRC after death.
If you require additional information on this topic and further guidance regarding your domicile status, please contact your usual Dixcart adviser or speak to Paul Webb or Peter Robertson in the UK office: firstname.lastname@example.org