The Pre-Budget Report of October 2007 announced a number of proposals, including changes to the tax rules relating to individuals who are UK resident for tax purposes but not UK domicile.

The concept of domicile is a legal concept. However, there is no statutory legislation in relation to domicile and therefore the term is not defined. The guidelines are based purely on rulings of the Court and a number of factors affect your domicile. Generally speaking you are domiciled in the Country where you have your permanent home. There are various types of domicile, but only one may apply to you at any one time. You acquire a domicile of origin upon birth which is the place your father permanently lives, if the child is born in wedlock, or otherwise from your mother. At the age of 16 you can then loose your domicile of origin and acquire a domicile of choice, for example if you move to another country.

Due to the tax treatment applied to non-domiciles in the UK many people wish to reside here but do not want to acquire a domicile here. Providing your domicile, as discussed above, is not in the UK you will receive special tax treatment in respect of income and gains arising outside of the UK.

For the purposes of inheritance tax, however, there is an additional form of domicile to consider. Even if you are domiciled outside of the UK under general principles there is a special rule which, if applies, will result in you having a deemed domicile in the UK. If you have been resident in the UK (for income tax purposes) in 17 out of the previous 20 years of assessment you will be deemed domiciled in the UK even if you intend to return to your home country. Due to the tax year in the UK running from 6th April to 5th April rather than a calendar year, it is possible to become deemed domiciled after only living in the UK for 15 or 16 calendar years.

Under current legislation those who are resident but not domiciled in the UK are only taxed on offshore income and capital gains if that income or capital gain is remitted into the UK.

The most significant proposal announced in the Pre-Budget Report is to impose an annual levy of £30,000 to those non-domiciles who wish to preserve the 'remittance basis' of taxation as described above. Whilst non-UK domiciles will continue to be able to take advantage of the preferable tax treatment available to them, they will only be able to do so if they pay this levy. The alternative is not to pay the levy and be subject to UK tax on all worldwide income and gains.

The proposals have not, as yet, made any changes to the current Inheritance Tax legislation.

If we take a basic scenario of an unmarried individual who has UK assets worth £300,000 and non-UK assets worth £300,000, therefore total assets worth £600,000. If they are non-UK domiciled there will be no inheritance tax payable. If, however, they are domiciled in the UK then they will incur an inheritance tax bill of £120,000.

The Pre-Budget Report means it is important to consider whether it is necessary to re-arrange your affairs and advice should be sought.