UK: UK Resident Non-UK Domiciliaries: The Remittance Basis

This note is intended as an introduction to certain UK tax issues that need to be covered where a "non-dom" (an individual domiciled outside the UK) is planning on becoming resident in the UK and using the remittance basis of taxation.

It should be emphasised that this is a complex subject, and a note such as this can do no more than highlight the issues that need to be considered and discussed. Expert, tailored tax advice should be taken well in advance of becoming UK resident.

The remittance basis will almost certainly be a feature of the UK tax code for the next 5 years, as the current Conservative government is broadly supportive of non-doms and the positive contribution which they make to the UK economy. Nevertheless, there is a public perception that non-doms do not "pay their fair share", and it is reasonable to expect some alterations to the regime under the current administration. Some changes which might be implemented over the coming years are touched on below.

Overview

• An individual with a non-UK "domicile of origin" can preserve his non-UK domiciled status for a long period after becoming UK resident, provided that he intends to cease being resident in the UK in the future.
• Any individual who is tax resident in the UK but is domiciled outside the UK is entitled to use the special basis of taxation known as the remittance basis. The essence of this is that although UK income and gains are immediately taxable, non-UK income and gains are not taxable, unless and until the relevant proceeds are brought into the UK.
• Generally, the remittance basis must be claimed in tax returns, and for longer-term UK residents there is typically a "fee" that must be paid if the remittance basis is to be used.
• Where an individual intends to become resident in the UK as a remittance basis user, it is important that he takes expert tax advice regarding "pre-arrival" steps, to be undertaken before UK residence begins. Such steps need to be implemented with care to ensure that being a remittance basis user is as tax-efficient for the individual as possible.
• In addition to "pre-arrival" planning advice, it is important for any remittance basis user to have periodic "check-ups" with a tax adviser. The complexity of the UK tax rules means that mistakes are easily made, and repeated mistakes could be very expensive. In addition, there can be changes to the rules or how they are interpreted, and such changes can be missed unless the individual is in reasonably regular contact with a tax adviser who has expertise in this field.
• Any UK resident foreign domiciliary should consider making, and periodically updating, a "domicile statement" which explains the factual and legal basis on which he is taking the position that he is domiciled outside the UK, so that the statement can be used if the position is challenged by HMRC. There is anecdotal evidence that HMRC are becoming more assertive in questioning the foreign domicile of long-term UK residents; a recently prepared domicile statement can be powerful evidence of the retention of a foreign domicile, in the event of such a challenge.

What is a non-UK domiciliary?

A non-UK domiciliary (sometimes called a "non-dom") is an individual who is domiciled outside the UK for the purposes of English common law.

"Domicile" is a concept in English law which is different from the UK tax concept of residence. It is also unrelated to nationality. It is perfectly possible for an individual to be resident in one country, domiciled (for English law purposes) in a second country, and a national of a third.

Non-UK domiciled status can persist for a long time after an individual has become resident in the UK. Under English common law, an individual may have been UK resident for decades, and may even have acquired British nationality, and yet have a domicile outside the UK. This will be the case if the individual had a "domicile of origin" outside the UK and he or she has never acquired a "domicile of choice" in any part of the UK.

Every individual is born with a "domicile of origin". If his parents were married at the time of his birth, his domicile of origin will have been the domicile of his father at that time. An individual can however acquire a "domicile of choice" in a different country, if he moves to that country and forms an intention to reside there permanently or indefinitely.

An individual with a non-UK domicile of origin will remain non-UK domiciled for as long as he can credibly say that he intends to cease residing in the UK at some point in the future. For example, it is common for individuals with foreign domiciles of origin to intend to leave the UK when their children cease to be in full-time education in the UK, on the termination of a particular job with a UK employer, on the sale of a particular UK company, on their retirement, etc. As long as the intention to leave the UK is realistic, the domicile of origin will be retained in these scenarios.

Determining an individual's domicile is not necessarily straightforward, but where an individual was born abroad, or his parents lived abroad, or he has a foreign passport, it is likely to be worth investigating his domicile further to see whether he may be a "non-dom".

Why is domicile important?

In English law, the significance of domicile goes beyond tax. In particular, a non-English domicile can affect succession to "movable" assets such as bank accounts and shares. Even where such assets are in the UK, the way they pass on the individual's death may be affected by the succession law of his country of domicile.

Where tax is concerned, there are two main advantages of being a non-dom:

• The remittance basis of taxation; and
• The restriction of inheritance tax (IHT) to UK assets.

This note focuses on the remittance basis and the steps which should ideally be taken before a non-dom becomes resident in the UK. For a discussion of the IHT advantages of being domiciled outside the UK, see our note "Non-UK domiciliaries: Inheritance tax issues and opportunities".

The essence of the remittance basis

The remittance basis is only relevant to individuals who are tax resident in the UK. Whether an individual is resident in the UK for tax purposes is decided by a statutory test, which looks at time spent in the UK but often also the number of "ties" that the individual has to the UK. The analysis required to determine residence status can be complex. For a discussion of the statutory residence test, please see our briefing note on this subject.

The remittance basis is available to anyone who is UK resident but foreign domiciled. For IHT purposes there is a concept of "deemed domicile" in the UK, but this concept does not apply to income tax or CGT. Being deemed domiciled in the UK for IHT purposes does not prejudice an individual's ability to use the remittance basis.

The benefits of the remittance basis are best understood by comparing the tax position of a remittance basis user with an ordinary UK taxpayer.

An ordinary UK taxpayer, i.e. an individual who is not only resident in the UK but also domiciled in the UK, pays UK income tax and capital gains tax (CGT) on a worldwide basis. Income of such an individual is taxable in the year in which it arises, whether the income has its source in the UK or outside the UK. Similarly, capital gains of such an individual are taxable in the year in which they accrue, whether such gains are in respect of UK or non-UK assets. This is called the "arising basis". It is a system of taxation which generally does not differentiate between UK and foreign receipts, and under which it does not matter whether such receipts are brought into the UK or left outside the UK.

By contrast, a UK taxpayer who is using the remittance basis benefits from a postponement of UK tax on foreign receipts. The essence of the regime is that, although UK source income and UK gains give rise to tax in the same way as for ordinary taxpayers, income from non-UK sources and gains arising on the disposal of non-UK assets are not immediately taxable. There is a deferral of UK tax on such income and gains until cash or other assets representing or deriving from them are brought into the UK ("remitted").

The concept of "remittance" is wider than might be assumed, and great care needs to be taken to avoid inadvertent remittances. A remittance can occur not only through actions of the remittance basis user himself, but also through the actions of certain related persons (which the remittance basis legislation calls "relevant persons"). Moreover, payments occurring outside the UK can trigger a remittance if there is some connection with the UK – for example where the payment is in respect of a loan which has been used in the UK, or is in respect of a service which has been provided in the UK.

A full discussion of the concept of "remittance" would be extremely lengthy. Anyone using, or proposing to use, the remittance basis should make sure that they have received advice which explains the various ways in which a remittance can occur, and should make sure that they have some level of understanding of who will be considered a "relevant person" in relation to them.

Despite the breadth of the concept of "remittance", the deferral of tax provided by the remittance basis may be (and often is) indefinite. Tax on foreign income and gains can be avoided altogether if the remittance basis user succeeds in not remitting anything which represents or derives from such income and gains.

Moreover, assets which do not represent or derive from such income or gains (so-called "clean capital") can be brought into the UK without triggering income tax or CGT. The concept of "clean capital" encompasses the following:

• income and gains received before the commencement of UK residence
• income and gains which were taxable on the arising basis (i.e. because the income was UK source or the gains were in respect of UK assets) and
• outright gifts and inheritances from other individuals.

As discussed below, much planning for foreign domiciliaries who are using the remittance basis focuses on ensuring that their "clean capital" is kept separate from foreign income and gains, so that the capital can be used for UK spending, without any tax being triggered on foreign income and gains. This is sometimes called "segregation". This is straightforward where cash is concerned, but less straightforward in relation to investment portfolios.

In addition, it makes sense (from a tax perspective) for such individuals to choose investments that do not qualify as UK assets, and that do not give rise to UK source income. This is primarily so that disposals of investments do not give rise to an immediate charge to CGT, and similarly so that there is no immediate charge to income tax on any income generated by the investments.

Remittance basis claims and charges

In some situations the remittance basis applies automatically. However, generally it is optional, and there is a requirement to make a "claim" to be taxed on the remittance basis. This is made in the individual's tax return for the relevant tax year. The decision to use the remittance basis does not need to be made until after the tax year is over.

In the first 7 tax years of UK residence, the remittance basis regime is available as a (more or less) free perk of being non-UK domiciled. The only potential downside of claiming the remittance basis is the loss of some relatively minor income tax and CGT allowances.

However, once it becomes the case that 7 or more of the 9 preceding tax years were tax years of UK residence (ie from the 8th tax year of continuous UK residence), a fee typically becomes payable for the benefit of the remittance basis (if it is to be claimed). This fee is technically an additional amount of tax, known as the "remittance basis charge" or RBC.

The RBC is initially £30,000 per annum. However, under the current rules, it increases significantly over time:

• to £60,000 per annum, once it becomes the case that 12 or more of the 14 preceding tax years were tax years of UK residence (ie from the 13th tax year of continuous UK residence); and
• to £90,000 per annum, once it becomes the case that 17 or more of the 20 preceding tax years were tax years of UK residence (ie from the 18th tax year of UK residence).

However, no RBC needs to be paid by an individual who was a minor (i.e. under the age of 18) throughout the tax year in question.

Since April 2008, when it was introduced, there have been a number of changes to the rules concerning the RBC, and for longer-term UK residents the RBC has been ramped up considerably. Further increases cannot be ruled out.

When determining whether the RBC is payable, and its amount, care needs to be taken with year-counting. UK tax years run from 6 April one year to 5 April the next. If an individual starts spending time in the UK partway through a UK tax year, and under the UK's statutory residence test is deemed to be UK resident in that tax year, that tax year will "go onto the clock" for the purposes of the RBC. This is so even if, by virtue of "split year" treatment under the statutory residence test, the individual is only taxable in the UK in part of the tax year.

A further issue in relation to the RBC (where it is payable) is the need for the remittance basis user to "nominate" foreign income or gains in his tax return. The nominated income or gains are notionally taxed at an extremely high rate to generate the RBC. Formerly, for technical reasons, it was usually desirable for a remittance basis user to have a special non-UK bank account in connection with this nomination process. Following a change in the rules, this is now generally unnecessary, provided that the nominated income/gains for a tax year do not exceed a certain minimal amount.

To claim, or not to claim

For some non-doms, it ceases to be economic to claim the remittance basis once the RBC starts to be payable after 7 tax years of UK residence (or when the amount of the RBC increases at a later date). This depends, essentially, on

1. whether the individual can avoid remitting his foreign income and gains (if they are to be remitted, there is no point in paying the RBC) and
2. whether the tax that would be charged on the income and gains, if they were taxable on the arising basis, would exceed the RBC (if not, there is no point in paying the RBC).

Many US citizens who are living in the UK stop claiming the remittance basis once there is a requirement to pay the RBC (even though a tax credit can, in principle, be claimed in the US against the RBC). The reason is that US citizens are taxable in the US on their worldwide income and gains, albeit at slightly lower rates than apply to wealthy UK residents; and in principle any UK tax paid on such income and gains is creditable against US tax. There is therefore limited benefit in keeping income and gains out of the UK tax net – it is often preferable to have the use of income and gains for UK expenditure. However, for the wealthiest US citizens who are domiciled outside the UK, claiming the remittance basis can still make sense.

For wealthy non-doms who are not US citizens, there is often a powerful economic argument in favour of claiming the remittance basis, notwithstanding the RBC (and even once the level of the RBC has risen to £90,000 per annum), to keep non-UK income and gains from non-UK assets outside the UK tax net.

Opting in and out

As noted above, the remittance basis is generally an optional regime. Under the current rules an individual who is resident in the UK but non-UK domiciled can, in principle, opt in or out of this regime as he sees fit. In principle, he can switch between the remittance basis and the arising basis, being taxed on one basis in one tax year and on the other basis in the next.

However, there has recently been a consultation on whether the rules should be modified, so that once has an individual has elected to use the remittance basis, such election will apply for a minimum number of tax years before the individual is allowed to change his mind. If this change is introduced, it will create difficulties for non-doms who might wish to switch between the two bases of taxation, depending on what makes financial sense in each tax year. However, the number of such individuals is already limited, largely because switching between the two regimes can create a tax position of huge complexity.

If a non-dom who was previously using the remittance basis moves onto the arising basis, it is unlikely that he will be in exactly the same tax position as a UK domiciliary. His current year income and gains will be taxable as they arise (regardless of where they arise and whether they are brought into the UK), but if (as is likely) he has money or other assets outside the UK which represent unremitted foreign income or gains (which accrued in the period when he was a remittance basis user), those income or gains will continue to be taxable if they are remitted to the UK. So an individual in this situation has an on-going need to segregate such money and assets, to avoid unexpected tax charges.

Pre-arrival advice

It is important for a non-UK domiciliary who is planning on becoming resident in the UK to obtain expert advice at the earliest opportunity. The advice should cover:

• The individual's immigration position in the UK, if he does not have the right to reside and work in the UK as a European national.
• What the individual needs to do in order to become UK resident under the statutory residence test, and when UK residence will commence. This can be very fact-specific.
• Changes that are likely to be needed to the individual's banking arrangements before UK residence commences (discussed below).
• Whether there are investments, investment-holding entities or investment "wrappers" which are unsuitable for a UK resident and should be disposed of or restructured. For example, the UK tax treatment of a single-premium life insurance product can be disastrous, if the policy has not been tailored for UK residents. In addition, foundations, usufructs and other entities and arrangements which cannot be created under English law can be problematic, as their UK tax treatment can be ambiguous.
• Whether there is scope for investments to be "re-based" prior to the commencement of UK residence. The purpose of "re-basing" assets is to ensure that gains on a later disposal are calculated by reference to market value of the investments shortly before UK residence commenced, rather than the original acquisition cost of the investments. Unlike many countries the UK does not have a rule that automatically "re-bases" assets when an individual becomes resident.
• How investments should be selected and managed, in view of the individual's status as a remittance basis user (discussed below).
• Whether it might be beneficial for the individual to make an election to HMRC, to give him the ability to make use of foreign losses (i.e. set losses realised on the disposal of non-UK assets against gains, for UK tax purposes). Generally, UK resident non-doms are unable to make use of foreign losses. After a non-dom has become UK resident for the first time, as a remittance basis user, he has a one-off opportunity to make an election so that foreign losses can be used. However, there are pros and cons of making such an election. For some non-doms it is preferable not to make the election, and for many others it is difficult to predict whether the election will make economic sense or not. In practice, relatively few individuals do make the election.
• If the individual will be purchasing a UK home (rather than renting one), how the purchase should be structured for UK tax efficiency. For UK residents, holding vehicles such as companies and trusts are rarely advisable, but it may make sense (even for a cash-rich purchaser) to use mortgage finance when purchasing a UK home. This is to achieve a deduction from the value of the home for inheritance tax purposes. Such a deduction can, generally, no longer be achieved if mortgage finance is obtained after the purchase.

It may take time to implement planning which needs to be undertaken before UK residence commences. This is one reason why a non-UK domiciliary should take advice at an early stage, once he has decided to become resident in the UK. The other reason is that, under the statutory residence test, UK residence can commence before the individual expects - and in extreme cases, even before the individual has set foot in the UK.

Bank account management

Remittance basis users typically need to adopt specialised bank account arrangements. These apply to cash accounts and often also to investment accounts. The aim is to ensure:

• that clean capital is not mixed with foreign income or gains,
• that UK expenditure is funded from clean capital, and conversely
• that non-UK expenditure is funded from foreign income or gains.

It is essential that advice is taken on such arrangements and that they are put in place before the commencement of UK residence, so that there are no inadvertent remittances to the UK of non-UK income or gains, and so that the stock of clean capital that the individual has at the start of UK residence is not contaminated or depleted unnecessarily. Tax efficient use of the remittance basis relies on clean capital being conserved and safeguarded, particularly as it is often uncertain how long the individual will be resident in the UK.

Suitable investments for remittance basis users

Generally, remittance basis users should avoid UK investments - ie investments which may give rise to UK source income or, on disposal, UK gains. Such income and gains will be taxable immediately, as the remittance basis only applies to non-UK income and gains. In addition, if a UK investment is acquired using funds that represent non-UK income or gains, the income or gains will be remitted. A further disadvantage of holding UK investments is that they are within the scope of IHT.

The question of what is a "UK investment'" is far less straightforward than may be expected. There are different rules for the various UK taxes, which can produce the result that a particular investment is a "UK investment" for one purpose but not others. In particular, the rules that apply for CGT purposes can be counter-intuitive.

In addition to not containing UK investments, it is often desirable for a remittance basis user's investment portfolio (or at least part of it) to be run in such a way that clean capital, non-UK income and non-UK gains are kept separate. The aim is to arrange matters so that, if it proves necessary for the individual to use funds drawn from the portfolio for UK spending, the tax triggered on remittances of non-UK income and gains is minimised. The details of how this is achieved are beyond the scope of this note. Certain investments work well within this kind of strategy, whereas others do not, due to a tendency to cause capital and income to be mixed on sale/redemption.

Pre-arrival tax advice should cover which investments are definitely to be avoided within a remittance basis user's portfolio, those which are potentially problematic and require case-by-case analysis, and those which are unproblematic provided that they are correctly managed.

It is worth stating that, where investments are concerned, there are a number of possible strategies that a remittance basis user may adopt. Which is most suitable will depend on the individual's particular circumstances, and in particular how the value of his investable wealth compares to the amount that he is likely to need for UK expenditure over the course of his anticipated period of residence in the UK. There is no "one size fits all" strategy.

If the individual's investable wealth greatly exceeds the amount that is likely to be needed for UK spending, he may wish to run two separate portfolios, one "UK facing" and one "non-UK facing". The "'UK facing" portfolio would be run in such a way as to avoid, as far as possible, the mixing of capital, income and gains, as well as to avoid UK investments. UK investments would also be avoided in the "non-UK facing" portfolio, but otherwise that portfolio would be run without regard to UK tax considerations - it being accepted that a remittance from that portfolio would be expensive in tax terms.

Can you rely on advice from your bank?

It is sometimes assumed by non-UK domiciliaries who are becoming UK resident that they can rely on their bank to set up their accounts correctly and select investments which will be tax-efficient for them.

However, banks are not tax advisers, and a bank will generally not regard itself as being liable for tax charges incurred by its clients. Indeed many banks specifically exclude such liability in their client mandates or standard terms of business.

There is a wide variety in the level of awareness within non-UK banks regarding the special requirements of remittance basis users. Even where the individual's banker professes to have expertise, it is desirable for the individual himself to take his own tax advice on how his accounts should be set up and managed, and how investments should be selected and handled. There are two reasons for this.

One is that, at best, any individual banker can only be expected to have a reasonable level of awareness of the remittance basis rules; and no banker is, or should be expected to be, a UK tax expert. In fact, the level of understanding can be quite basic, and there are widespread misconceptions. No bank can be relied on to avoid tax mistakes occurring, unless the bank has been given very precise directions, spelling out how accounts should be managed, and how investments should be selected and handled.

The second reason is that if precise directions have been given to the bank, and steps have been taken by the bank which did not comply with those directions, causing the accrual of UK income or a UK gain, a remittance of non-UK income or gains, or the contamination of capital, there may be scope to reverse the relevant steps and take the position that, for tax purposes, they did not occur. This is under what is known as the "Roxburghe principle". This is only possible where the bank has been given precise directions, which have been breached. It is not an option where the individual has assumed that the bank has sufficient expertise to avoid such mistakes, and has not given it any directions as to how his accounts and investments should be managed.

Employments and directorships

Employments and directorships are another complex subject, on which expert advice is required. Due to a recent change in the tax rules, the need for advice applies not only to individuals who are preparing to become resident in the UK as remittance basis users, but also to existing UK residents who are using the remittance basis, and who are employed by or have directorships with non-UK companies.

The UK tax legislation has specific, and very detailed, provisions regarding "earnings". Earnings include salaries and director's fees. The concept also extends to deemed earnings arising in relation to "benefits in kind", i.e. non-cash benefits received from an employer or a company of which the recipient is a director. For these purposes, a director includes a "shadow director", i.e. an individual who (although not formally appointed as a director) in practice exercises significant influence over board decisions or decisions which ought to be taken by the board.

Examples of benefits in kind that can give rise to deemed earnings include the rent-free occupation of a house owned by a company of which the individual is an employee or director, free use of an aircraft owned by such a company (otherwise than for journeys necessary for that company's business) and an interest-free or low interest loan from such a company or which is guaranteed by such a company. The latter can be a particular trap, because for a number of reasons a loan may be treated as a benefit in kind under the UK tax rules even where under foreign tax rules it qualifies as a loan on commercial terms.

In principle, earnings that relate to non-UK activities can qualify for the remittance basis where the individual is non-UK domiciled. With the benefit of good advice, it is not particularly difficult to secure the remittance basis on earnings that relate to activities performed outside the UK in the first three tax years of residence in the UK.

However, the position becomes much more complicated, and much more difficult, once the first three tax years of UK residence have passed. For earnings from a non-UK company to benefit from the remittance basis after the third tax year of residence, a series of technical hurdles have to be cleared. In some cases, the earnings have to suffer a significant amount of foreign tax for the remittance basis to be available (which obviously diminishes the attractiveness of securing the remittance basis on such earnings). It is important to note that these hurdles apply not only to actual earnings, but also to deemed earnings that arise due to the receipt of benefits in kind. So a benefit in kind from a non-UK company can be taxable in the UK even where the benefit has been received entirely outside the UK.

Where a UK resident is an actual director of a non-UK company, or the circumstances are such that there is a risk of him being considered a shadow director, it is necessary to consider not only his personal tax position in relation to earnings or deemed earnings from the company, but also the company's own tax position. There may be a risk of the company being made tax resident in the UK due to the taking of strategic decisions in the UK, in which case the company's profits would become subject to UK corporation tax. Alternatively, profits of the company may be brought within the UK tax net due to the existence of a "permanent establishment" in the UK.

Expert advice should be taken on how to minimise these risks, and such advice should be followed carefully in practice.

Complexity of the remittance basis

Although the remittance basis is a generous regime, it is also very complicated. Expert advice is required to make the most of the regime and to avoid expensive mistakes. As already stressed, such advice should be obtained well in advance of implementation of any decision to move to the UK, so that the structuring of bank accounts and investment portfolios (and possibly also changes to employment arrangements and/or directorships) can occur before the commencement of UK tax residence.

All non-doms are in fact well advised to take professional advice at regular intervals, as the UK tax regime is changeable and this applies particularly to the taxation of non-UK domiciliaries.

Having said all this, it remains the case that many non-doms are able to structure their affairs to enable them to live in the UK with a very low tax liability. For high net worth non-UK domiciliaries, living in the UK using the remittance basis tends to compare very favourably with superficially similar overseas tax regimes which are intended to attract wealthy foreigners, such as the lump sum basis of taxation which is available in certain cantons of Switzerland. It is worth stressing that unlike the lump sum basis, the remittance basis does not tax by reference to standard of living. UK expenditure may be very high, but this has no tax consequences if the expenditure is funded from clean capital.

How can an individual maintain non-dom status?

Some non-doms live in the UK for long periods, in some cases decades, and yet continue to claim non-dom status. As explained above, under the current rules these individuals can legitimately file as non-doms if they have not formed an intention to remain in the UK permanently or indefinitely. This will be the case if they intend to leave the UK at some reasonably definite point in the future, for example on reaching retirement age, on the sale of a UK business which they are involved in managing, or when their children have finished being educated in the UK.

Strictly, there is no need for a particular other country to be identified as the country to which the non-dom intends to move when the time comes. However, it can be helpful in discussions with HMRC to point to a particular country, which may not be individual's domicile of origin.

HMRC look at a number of factors in assessing whether an individual with a foreign domicile of origin has retained his non-UK domicile or has acquired a domicile of choice in the UK, including:

• the individual's statements as to his or her intention to leave the UK in the future;
• the location of the individual's permanent residence(s);
• the location of the client's business interests;
• the individual's social and family connections; and
• the form of the individual's will(s).

Of these factors, the first is supreme, but it is often useful to be able to point to links with another country by way of evidence of the individual's intention to move there in due course, eg in the form of a permanent residence there, business interests or investments in that country, family members there, membership of societies, a will governed by the law of that country, etc.

An individual's domicile of origin is regarded as hard to lose, but the longer an individual remains in the UK, the more risk there is of his or her non-dom status being challenged by HMRC. Such a challenge may occur in the individual's lifetime or (more commonly) after his death, when his or her personal representatives will have to gather evidence regarding the deceased's intentions. This can be very difficult unless the risk of challenge has been anticipated and addressed.

There is evidence that HMRC are becoming more aggressive in challenging filing positions based on a domicile outside the UK, not only in relation to individuals who have died as UK residents, but also in relation to living taxpayers. In view of this, it makes sense to take steps, in advance of any such possible challenge, to take legal advice on domicile and ensure that the evidence of foreign domicile is as strong as possible.

It is often advisable for non-UK domiciled individuals who are residing in the UK to prepare a domicile statement, which we can assist with. The purpose of a domicile statement is to set out supporting evidence of the individual's claim to be a non-dom. This is extremely valuable in the event of a domicile challenge by HMRC and is particularly useful as evidence of an individual's intentions if there is a post-mortem domicile dispute. Such a statement is often enough to make HMRC back down and concede that non-dom status was retained until death. The tax consequences of a successful domicile challenge by HMRC, on the other hand, can be calamitous.

Non-UK domiciliaries who have prepared a domicile statement in the past should consider whether it needs updating, to address any changes in their personal circumstances, and perhaps simply to confirm that the passage of time since the last such statement was written has not affected their intention to leave the UK when the circumstances allow.

In a dispute with HMRC about domicile, a recently written domicile statement has a lot more force than one written ten or twenty years ago.

Buying UK real estate

Where a UK resident non-UK domiciliary is considering the purchase of UK real estate as an investment, to be let to third parties on a commercial basis, there are a number of options, including the possibility of using a non-UK company as a holding vehicle.

However, when it comes to purchases of personal homes for UK resident non-doms, there is less flexibility. Recent legal developments have made a number of possible holding structures, which were once viable, unattractive. In many cases, the best approach now is for the house to be purchased by the individual himself (not using any form of special purpose vehicle). Consideration should be given to using bank borrowing for the purchase, secured by a mortgage on the property. The bank debt will then be deductible from the value of the house for IHT purposes.

Formerly, it was common for non-doms to purchase houses using cash and then to "gear up" by borrowing from a bank, granting a mortgage over the property, and using the borrowed funds to acquire non-UK investments. This used to be IHT-efficient, but unfortunately this is no longer the case. Under rules introduced by the Finance Act 2013, where the bank borrowing has been used to acquire non-UK assets that are outside the scope of IHT, the debt to the bank is non-deductible for IHT. This issue affects all loans used, whether directly or otherwise, to fund the acquisition of non-UK assets that are outside the scope of IHT – there is no "grandfathering" of pre-Finance Act 2013 loans. Non-UK domiciliaries who may be affected by the issue should take advice.

Another approach which was sometimes taken by non-doms in the past was to borrow to purchase a UK home with security being granted to the bank not over the home, but over foreign investments (a so-called "Lombard loan"). Following a change of position by HMRC, such arrangements are now deeply problematic for remittance basis users (see our briefing note "Collateral damage"). Remittance basis users who have taken out Lombard loans for UK expenditure (including, but not limited to, for the purchase of a home) should take advice urgently.

Possible future changes

As noted above, it seems likely that measures will be introduced to make it difficult for UK resident foreign domiciliaries to switch frequently between the remittance basis and the arising basis, to avoid remittance basis charges in some tax years. If so, this will add to the complexity of the tax regime for non-doms, but the number of individuals actually affected by the change is likely to be small.

Also as noted above, there is a possibility of further increases to the RBC, perhaps with the introduction of an even higher annual charge for those who have been UK resident for a number of decades.

It is also possible that legislation will be introduced to reduce the class of those who qualify as non-doms for tax purposes. As a matter of general English law, an individual may have been born within the UK and yet qualify as non-UK domiciled; and may have naturalised as a British citizen, or even have been born one, and yet qualify as non-UK domiciled. This is perceived as anomalous in some quarters, and it is conceivable that new rules will be introduced to deem such individuals, for tax purposes, to be UK domiciliaries (so that they cannot access the remittance basis).

Another possibility is that legislation will be brought in so that, once an individual has been UK resident for X out of the last Y tax years, he will be deemed domiciled for income tax and CGT purposes (and will cease to qualify for the remittance basis), along the lines of the deemed domicile test for IHT. A change of this nature would answer the criticism that, as the rules currently stand, they allow individuals to continue to use the remittance basis for longer than is necessary to attract peripatetic talent and wealth to the UK; and that there ought to be some limit on how long an individual is permitted to enjoy a special tax regime which is intended for use by those who are only transiently resident.

Other issues and opportunities

The legal and tax treatment of non-doms is a highly complex area and this note only covers a selection of the relevant issues. Other important issues for non-doms to consider include:

• the possibility of (in effect) converting foreign income or gains into clean capital through gifts to family members;
• the possible use of investments, securities or structures which can eliminate the need to pay remittance basis charges;
• tax-efficient philanthropy – as there are particular opportunities for remittance basis users;
• IHT planning (as discussed in our note "Non-UK domiciliaries: Inheritance tax issues and opportunities");
• estate planning for foreign assets – whether local Wills are necessary, and the impact of local succession laws (for example, forced heirship rules may apply); and
• specific issues which may arise due to an individual's domicile or nationality, or where his assets are situated. For example Indian domiciliaries resident in the UK may be able to take advantage of the favourable provisions of the UK/Indian IHT double tax treaty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.