Introduction
The UK has long been the choice destination for those seeking business opportunities, high standards of education, and a high standard of living.
To maintain its position as a global financial center, the UK has implemented a tax system that includes specific tax treatment for non-domiciled individuals.
Thus, individuals who are non-domiciled, also known as non-doms, are those individuals who have their permanent domicile outside the UK, but who are residents in the UK.
This article explores the tax rules and implications for non-domiciled individuals in the UK. Read on to find answers to your questions on this subject, and to discover some attractive opportunities for the future.
What is the Non-Domiciled Status?
Non-domiciled, or non-dom is a British tax status that has been available since the French Revolution, yes, it’s been around for a while! Under this regime, an individual who was born in another country, or if his/her parent is from another country, can only pay tax in the UK on income earned in this country.
This system has allowed wealthy foreign people to enjoy all the benefits of life in the UK while paying very little UK tax, as they earn most of their income abroad.
Even though this regime sometimes allows foreigners to abuse the law for their personal gain, it should be mentioned that this specific category is obliged to pay taxes in the countries where they earn their income. However, the fact that they live and are tax residents in the UK, ends up paying little or no tax.
The result is that many of the wealthy people living in the UK do not contribute to direct UK taxation. Indirectly, however, the system is still considered to work because these individuals pay VAT on goods and services in the UK and create many jobs, especially in the service sector, where employees in turn pay income tax.
In 2015 the system was reformed, and Non-doms are now limited to 15 years. These last reforms have effectively reduced the number of people claiming non-dom status.
How to qualify for Non-Dom Status?
As mentioned, a non-dom is a person who lives in the UK and is resident for tax purposes in the UK but is permanently resident outside the UK. This individual must prove to HMRC that his/her domicile, especially for tax purposes, is in another country.
Usually, his/her residence will be the country that his/her father considered as permanent residence when he/she was born, and to which this particular individual intends to eventually return, perhaps on retirement.
As a rule, a non-UK domiciled individual will not be a tax resident in the country where he/she is domiciled, and therefore will not be taxed in either country on his/her worldwide income.
Domicile is not statutorily defined and is a common law concept. Every person has a domicile. Unlike residence, it is not possible to be domiciled in two countries or not to have a domicile. So, there are two main ways to establish domicile:
- Domicile of origin – this is either the country that you were born in or, if your father came from a different country, your father’s domicile.
- Domicile of choice – if you are over 16 and choose to leave your domicile of origin and live indefinitely in another country, you can acquire a new domicile of choice in that new country. This overrides your domicile of origin.
In general terms, if an individual with a UK domicile of origin wishes to acquire a new domicile of choice outside the UK, they have 2 options:
- to leave the UK and settle permanently in that other country and this also includes cutting ties with the UK; or
- if you already live abroad, you intend to remain in that country permanently or indefinitely.
The determination of an individual’s domicile is not necessarily easy, but if a person was born abroad, and his parents had lived abroad for a long period of time, it may be worth investigating to determine domicile status and how this may impact their UK tax position.
‘Deemed domicile’ and its impact on your tax position
‘Deemed domicile’ is a concept used in the UK tax system to determine an individual’s tax position. It is a rule that applies to non-domiciled individuals who have been UK tax residents for a significant period. ‘Deemed domicile’ status can have significant implications for an individual’s tax liabilities in the UK.
Under the deemed domicile rule, if an individual has been a UK tax resident for at least 15 out of the previous 20 tax years, they are deemed to be domiciled in the UK for tax purposes. This means that they are subject to the same tax treatment as UK-domiciled individuals and are no longer eligible to claim the remittance basis of taxation.
Once an individual becomes deemed domiciled, they are subject to UK tax on their worldwide income and gains, regardless of where the income and gains are generated.
This includes both their UK-source income and gains as well as their foreign-source income and gains. Additionally, they are no longer able to shelter their foreign income and gains from UK taxation by keeping them outside the country.
Becoming deemed domiciled in the UK can have significant implications for an individual’s tax planning strategies. It may require a reassessment of their investment portfolio, offshore structures, and overall wealth management. Individuals in this position may also need to consider the impact on inheritance tax, as deemed domicile status affects the inheritance tax treatment of their worldwide assets.
It’s important to note that even if an individual becomes deemed domiciled, they may still be able to claim relief under certain double tax treaties to mitigate the impact of double taxation on their foreign income and gains. In this context, seeking professional tax advice is crucial to understand the specific implications and plan for the changes in tax status.
It is worth mentioning that as in September 2021, the UK government announced proposals to reform the tax treatment of non-domiciled individuals, including changes to the deemed domicile rules.
The benefits of being non-dom on the income tax position
Individuals who are both UK-domiciled and tax residents are taxed in the UK on their global income and gains. In the case where an individual is resident in the UK but has a non-dom status, he/she can choose to be taxed on either an income tax or a transfer tax basis.
- Arising basis – the income is subject to tax in the year it arises or is received. It does not matter whether this income is brought into the UK or kept abroad (i.e. taxable on worldwide income and gains).
- Remittance basis – foreign income is only taxed in the UK if it is returned/remitted to the UK or received in the UK.
Please note that UK income and capital gains will always be taxed on a sourced basis for people without permanent residence in the UK.
The remittance basis must be requested annually on your tax return. In the absence of a claim, the source basis automatically applies. There is an exception where unremitted overseas income and/or capital gains are less than £2,000. In these circumstances, the remittance basis applies automatically, so no application is required.
Individuals can choose to register and cancel the remittance basis annually. This can be a good tax planning exercise as you will already know your income situation for the tax year in question, allowing you to make an informed decision based on full knowledge of your UK obligations.
If a claim is made on a remittance basis, there will be no personal allowance or tax relief available to use against UK source income in that tax year.
Also, there will be no entitlement to annual CGT exemption. Note that a claim must be made for this to take effect, therefore the £2,000 rule detailed above does not result in the loss of deductions.
Eligibility to apply for a remittance basis
- Non-residents can apply for remittances without paying an additional fee for the first 7 years of residence in the UK.
- Long-term UK residents who intend to continue to claim remittance basis are subject to an annual remittance basis charge (RBC) payable via the self-assessment tax system.
- Non-doms who have been UK residents for at least 7 of the previous 9 tax years immediately before the relevant tax year will pay an annual RBC of £30,000.
- Non-doms who have been UK residents for at least 12 of the previous 14 tax years immediately before the relevant tax year will pay an annual RBC of £60,000.
As such, whether the remittance basis can be claimed will depend on the level of foreign income, the associated UK tax liability, and how this compares to the relevant RBC.
Where a couple’s foreign income and any earnings accrue to only one partner, only one annual tax will apply. This strategy is a simple but effective tax planning option.
Highlights to remember
- An individual would still be entitled to make a claim for any foreign tax paid in the other country against the UK tax arising, provided there is a double taxation agreement between these two countries.
- The rates applicable to remitted income differ so that all remitted income is taxable at the non-savings rates (20% basic rate, 40% higher rate and 45% additional rate).
- The income accumulated in overseas bank accounts prior to the individual becoming a UK tax resident is known as ‘clean capital’, this can be remitted to the UK with no tax charge.
- There are complex rules regarding what counts as a remittance, which includes income/gains brought into the UK for the benefit of certain relatives.
- It is crucial to keep good records of your funds overseas to identify the source of funds brought into the UK and how it will be taxed in the UK.
Conclusion
Undoubtedly, the taxation of non-domiciled individuals in the UK is worth considering as an advantageous status.
The taxation of non-domiciled individuals in the UK is complex and nuanced. The remittance basis, the Statutory Residence Test, and the Annual Remittance Basis Charge are all key considerations for non-doms navigating the UK tax system.
Should you wish to discover more about your possible qualification for non-dom status, do not hesitate to book a free consultation with our team now.
Feel free to contact us today for more information.