Tax planning for mixed domicile marriages

You might have seen stories of Akshata Murty, the wife of the Chancellor of the Exchequer Rishi Sunak, and her ‘non-dom' status for tax purposes in the news recently.

The news stirred up a certain amount of controversy, but what exactly does it mean to have non-dom status and how does it work between married couples?

Here, we explain everything you need to know.

How does non-dom status work?

Foreign domiciliary tax residents living in the UK are entitled to pay UK tax either on their worldwide income or gains, or on a remittance basis.

If a taxpayer elects to pay on a remittance basis, they pay tax on UK sources of income and gains, as well as on foreign sources of income and gains, for the tax year in which they are brought into the UK.

That means unremitted foreign income and gains can escape direct UK taxes indefinitely if they are never brought into the country, but may still face significant local taxes.

Personal allowances are also lost under the remittance basis, while tax rates may be higher in the country a taxpayer is domiciled in.

Once a non-domiciled taxpayer has been resident in the UK for seven out of the last nine tax years, the taxpayer has to pay a remittance basis charge of £30,000.

After 12 tax years of residence, the remittance basis charge increases to £50,000.

Once a taxpayer has been a UK resident in 15 of the last 20 years, however, the remittance basis cannot be claimed at all.

Remittance basis and mixed domicile marriages

A remittance to the UK is widely defined as the use or enjoyment of foreign income in the UK, including the payment for services enjoyed in the UK.

Finance Act 2007 extended the definition of who can make a remittance to include ‘relevant persons'.

Spouses are relevant persons to each other, for instance. So, if one spouse made a payment of foreign income to the other who then remitted that payment to the UK, the first spouse would get a tax bill.

It is therefore difficult for a foreign domiciliary to benefit their spouse in the UK directly without tax consequences.

However, mixed domicile couples can have an arrangement between them so that the UK domiciled spouse pays for UK expenditure and the foreign domiciled spouse pays for foreign expenditure, thereby limiting the UK taxes they collectively pay.

Transfer of assets

UK tax legislation allows for the gift or transfer of assets between spouses at ‘no gain, no loss' for capital gains tax, which can also be an exempt transfer for inheritance tax.

This statutory relief allows married couples to balance their ownership of assets to make the most of personal allowances and marginal rates of taxation.

However, transferring assets between mixed domicile spouses where one can claim the remittance basis, or is not subject to UK tax at all, can provide greater tax planning opportunities.

Talk to us about your tax planning.