Deemed Domicile in the UK
HMRC are increasing their focus on people who are “deemed domiciled in the UK” following the 2017 changes to the domicile rules, and are starting to send “nudge” letters to affected individuals. This affects individuals who have been resident in the UK for 15 out of the last 20 years.
The Finance (No2) Act 2017 extended the Inheritance Tax concept of deemed domicile to Income Tax and Capital Gains Tax. Prior to the rule change, an individual who was a UK resident (for any period of time) and had a domicile of origin or a domicile of choice overseas could claim the remittance basis; paying a remittance basis charge of up to £90,000 instead of the tax due upon their worldwide income and gains that they left overseas. Under this system you could claim the remittance basis indefinitely, provided paying the £90,000 charge was more beneficial than paying UK tax on your foreign income and gains of course.
From 6 April 2017 – under the new rules – if an individual is not considered UK domiciled under English common law, they will be considered deemed domiciled in the UK for tax purposes if:
- the individual has been a resident in the UK for 15 of the last 20 tax years immediately before the tax year in question; or
- the individual is born in the UK; their domicile of origin is the UK; and is a UK resident for the tax year in question.
Individuals who meet either of these criteria are not allowed to claim the remittance basis of taxation. Instead, they are required to report, and will be taxed in the UK on, their worldwide income and gains.
HMRC ‘Nudge Letters’
Since late 2020, HMRC have started sending out ‘nudge letters’ to agents across the UK, notifying them that HMRC think that the 2017 rule changes may affect their clients.
HMRC are concerned that individuals who are now deemed UK domiciled, may not have declared their worldwide income and gains, as they do not realise the new rules apply to them.
If this has happened, such individuals may have submitted inaccurate tax returns for 2017-18 or later, if they have not declared their worldwide income and gains which are now subject to UK tax.
The nudge letters also remind individuals that they have the responsibility to submit accurate tax returns and the letters refer to the new deemed domicile rules, what an individual affected by the rules is required to disclose on their tax returns and how to determine whether any amendments to a 2017-18 or 2018-19 tax return is required.
The letter also explains what an individual must do if they have omitted any relevant tax liability, but it is not possible to make amendment to their 2018-19 UK tax return.
Significant penalties can be imposed if you fail to properly report offshore matters. If you are deemed domiciled in the UK and do not report foreign income and gains, you may fall into an offshore category of penalties. HMRC then have a number of options available, such as:
- individual penalties ranging from the usual 0% to 100%, all the way up to 300% of the tax due on undisclosed income if it arises in countries that do not share information with HMRC;
- penalties of up to 10% of the value of the asset, on top of the penalties on the income or gains;
- “naming and shaming” by publishing your name and address; and
- pursuing criminal prosecution against you for failing to report offshore income and gains.
The penalties are greatly increased if a disclosure to HMRC is “prompted”. This is when you only make the disclosure to HMRC after receiving your own “nudge letter” or if HMRC open an enquiry into your tax affairs before you make a disclosure.
Then there are various other factors that influence the severity of the penalty imposed by HMRC, for example whether the non-compliance was deliberate or a mistake.
A defence to non-compliance and non-disclosure does exist where an individual has a ‘reasonable excuse’. However, this is an objective test that is analysed by looking at the facts of the case and, for offshore matters, what is considered a reasonable excuse is severely limited. This means that the success of any claim can not be guaranteed.
What Does this Mean for Me?
Nudge letters are issued by HMRC when a taxpayer fits a profile of someone who is likely to have made a mistake or deliberate error. An enquiry may then be opened by HMRC if they do not receive an appropriate reply to their “nudge”.
The potential penalties, and interest, on any undeclared income and gains mean it is important to act without delay if you believe you are affected.