Common people

One of the key areas for confusion since moving to Dubai is expats and their domicile position.

 

To be fair, it is one of the many confusing areas of the UK’s atrocious tax code… and I say that as someone who is paid to decipher it.

 

The UK is unusual, albeit not unique, in that the general law concept of domicile has a substantial impact on a person’s domicile.

 

Sometimes, the tax law pretends people are domiciled for tax purposes (even if their status remains the same for general law purposes). This generally limits any advantages.

 

For an expat in Dubai, the most relevant UK tax issue is likely to be UK Inheritance Tax (“IHT”).

 

Help the (C)aged?

 

UK IHT is based on domicile status. If you are UK domiciled, you pay UK IHT on your worldwide assets.

 

Period.

 

Of course, this is no help to someone who is simply non-UK resident because they are planning on a few years earning some corn in Dubai.

 

Non-residence is not a complete silver bullet if the individual has UK assets producing income and capital gains.

 

If they have UK property and some other UK source income (the notable exception being UK dividends save for the temporary non-residence rule) then they will continue to pay UK income tax.

 

Also, since 2019, all disposals of direct and indirect interests in UK real estate have been subject to UK CGT. Though, subject to the temporary non-residence rule, other gains are unlikely to be taxable.

 

Something changed?

 

But a non-UK domiciled individual will only be subject to UK IHT on UK assets.

 

What if our intrepid client has been non-resident for many years. They don’t want to return to the UK. It’s too cold. They’ve turned on the TV recently.

 

Can they shed their UK domicile and shed some of their IHT exposure?

 

The answer is they cannot shed their UK domicile of origin (“DOO”). But they can acquire a domicile of choice (“DOC”) outside of the UK.

 

Splitting hairs?

 

No, the distinction is important.

 

I liken this to half-assed decorating.

 

Say you have some hard to shift woodchip on the wall. Let’s face it, its hard to shift.

 

So, like any half-assed handy Andy, you leave it and paint over the top.

 

And a single coat of paint.

 

DOO = hard to shift, woodchip.

 

DOC = single magnolia coat of non-trade paint.

 

The woodchip is always there. It hasn’t disappeared.

 

The DOC coating will only be present where the following is established:

 

• Physical presence in a place; and
• Intention to stay in that place indefinitely

 

You’ll need to be resident there for many years before you have a hope in hell’s chance of HMRC accepting you have a DOC there.

 

However, remember, its only one coat of the cheapest, nastiest B&Q paint.

 

If you decide to live somewhere else at any time, and not even returning to the UK, then the entire layer is scraped off and the woodchip UK DOC is revealed again.

 

This is hardcore

 

So, let’s take the example of Deborah (naturally).

 

She was born in Sheffield, near the fountain down the road.

 

Her DOO is the UK (until we finally get a People’s Republic of Yorkshire).

 

She has lived in Dubai for almost 20 years. She has a settled life in the UAE. She doesn’t intend to go back to the UK.

 

Conceivably, she has a DOC in the UAE.

 

Her exposure would be to UK situs assets only.

 

She might look at using an excluded property trust to protect all of her assets (but not UK residential property since 2017).

 

But Deborah’s husband – Gaston – is a French National.

 

What if they plan to move to France?

 

This is where the wood chip comes in.

 

Once the person is no longer physically present in the place in which they’ve acquired their DOC, then the DOC coat of paint is scraped away to reveal, yes, the UK DOO woodchip.

 

Of course, in time, they might acquire a DOC in France – another, different coloured coat of paint. But, in time, is the key phrase.

 

Could it be any worse?

 

A different class

 

Well, yes, it could.

 

In our France example, at least the excluded property trust would remain effective from a UK perspective.

 

That said, it might be as popular with the French authorities from a French tax perspective as Madame Guillotine at the Versailles palace ball.

 

Well Deborah and Gaston might return to the UK. Of course, we would again be scratching away at the DOC veneer and revealing the UK DOO.

 

But the position is worse due to sneaky provisions in the reforms in 2017 was the concept of Formerly Domiciled Resident.

 

The word is that this was a direct response to Stuart Gulliver, former HSBC big cheese.

 

Broadly, it means that someone that had a UK DOO, lived overseas and acquired of DOC overseas, but then returns to the UK is, well, treated as a bit of a pariah.

 

What are the effects?

 

Not good:

 

• No remittance basis
• No rebasing
• No access to mixed funds temporary window
• No access to Protected Trust Relief

 

In addition, and pertinent to Deborah, there would be no benefit from excluded property after one year grace period.

 

As I said, pariah status.

 

Sorted for HMRC’s and…

 

Even if you haven’t been to the UK since Disco 2000 was still in the future, you need to be very careful.

 

Otherwise, your financial dreams might end up as pulp…

 

If you have any queries about this article, then please do get in touch.