UK: Changes To Taxation For Non-Domiciled UK Residents

Last Updated: 11 June 2008
Article by Michael McCormack and Michael Lloyd

Salans is a full service international law firm with offices in Almaty, Baku, Barcelona, Berlin1, Bratislava, Bucharest, Budapest, Istanbul, Kyiv, London, Madrid, Moscow, New York, Paris, Prague, Shanghai, St. Petersburg and Warsaw.

In his Pre-Budget Report (PBR) published on 9 October 2007 the Chancellor of the Exchequer outlined plans for the Government to toughen up its stance on so-called 'non-doms', i.e. those people who whilst resident in the UK declare that they are domiciled abroad, thereby putting themselves largely beyond the scope of UK tax regulations. 'Non-doms' have long been able to take advantage of a very favourable tax regime in the UK and only pay tax on the remittance basis. Using the remittance basis allowed non-doms to escape paying UK tax on their worldwide income. Instead they are only taxed on funds 'remitted' into the UK.

It seems as though one of the motivating factors underlying the proposed rule changes on non-doms was to be seen to be tackling the issue of the government's apparent bias toward the "super-rich" who have taken up residence in the UK, most notably with the advent of the oligarchs of Russia during the last few years. HMRC's have promised to correct certain 'flaws and anomalies' in the current rules applicable to non-UK domiciliaries who are resident in the UK. The emphasis was to be on ensuring that income and gains brought into the UK are taxed by shutting down loopholes.

However when put into context, the most onerous of the new provisions do not really seem to be aimed at the super-rich. After all the measure that has met with the most resistance is the standing charge of £30,000 for those electing to be taxed on the remittance basis, and £30,000 is unlikely to hit an oligarch too hard in the pocket. Instead it is the ever-growing number of foreign national workers in the financial services industry who will be feeling the pinch and many economists had expressed fears that this would lead to a brain-drain of this crop of bright young things.

After a consultation paper was circulated it became evident that the overwhelming feeling amongst tax professionals was that the proposed changes were too radical, especially given the fact that the government was proposing to implement them in a very short timeframe. Furthermore the potential gains to the Treasury's coffers from the increased revenue that the new measures would bring, would be more than off-set by the losses the UK economy would suffer should disgruntled taxpayers moved offshore. These doubts were only enhanced on 18 January when the government released the wording of the draft legislation on these tax issues. Grave concerns were instantly raised about certain details of the proposed changes to HMRC's treatment of offshore trusts and of the ramifications to a non-dom electings to be taxed on the remittance basis.

It is clear from the Chancellor's first budget that some, if not all, of the concerns about, and criticism for, the changes to the treatment of non-doms and offshore trusts have been taken on board and the result is a less contentious set of reforms. We will examine the key changes below and look at how the original proposals have been toned down:


Existing Rule

A person not ordinarily resident in the UK will be treated as resident for a tax year if he/she spends 183 days or more in the UK during the course of that tax year.

Original Proposed Amendment

Days of arrival and departure to count towards figure. Further, days spent in transit through the UK to other destinations to count, unless the transit is within the confines of airport (or port) space inaccessible to the public.

Final Amendment

The trigger for calculating a day spent in the UK, will be an overnight stay. Therefore for the purposes of day counting, a person who arrives in the UK on Monday and leaves on Friday will be said to have spent four days in the UK.

Existing Rule

HMRC use a practice rule, not derived from statute, in which a person is treated as a resident if their total number of days spent in the UK reaches 91, calculated as an average over four consecutive tax years


Once more days of travel will count towards a person's tally if they are triggered by an overnight stay.


'Arising' Basis

This is the assumed starting point. All worldwide income and capital gains are assessed in the tax year that they are received/earned. There is no fixed charge for a non-dom UK resident to be assessed on the arising basis. Retain benefit of personal allowances.

'Remittance' Basis

To be assessed on this basis requires a positive election on the part of the taxpayer. In order to use the remittance basis, a non dom will have to file a 'claim' for it. Under the current regime, the remittance basis does not need to be accessed via a claim.

There is a standing charge of £30,000 per person (i.e. as against per household) to use the remittance basis.

The standing charge is payable by anyone who:

  1. has been a resident non-dom (or 'not ordinarily resident') for 7 or more of the last 10 tax years, and

  2. is resident in the year of the claim.

When HMRC originally announced its plans for the changes to the rules on non-doms there was widespread hostility from the business community, particularly the high-flyers in the City, who would be significantly affected. In particular the plans for the standing charge for anybody electing to pay via the remittance basis came in for severe criticism, not least because it had been suggested that the standing charge would itself be taxable (i.e. if funds were brought into the UK in order to pay the levy). This would have meant that in effect the charge would have been closer to £50,000.

Another bone of contention caused by the original PBR, which led to displeasure in the City was the fact that HMRC indicated that paying tax via the remittance basis would be entirely separate to any considerations of eligibility for double taxation relief. Therefore the levy could not be set-off against other sums paid worldwide.

However after facing substantial criticism on this measure, HMRC confirmed in its clarification letter of 12th February that there would be no UK tax to pay on the £30,000 charge when remitted into this country, on the proviso that it is transferred direct to HMRC, rather than into a UK bank account.

One facet of the remittance basis outlined in the PBR that has not changed, is the fact that if an election is made by an individual to be taxed on the remittance basis, that person loses the benefits of personal allowances for both Income Tax and CGT.


As the rules stand, the capital gains of an offshore trust are not taxable in the hands of non-domiciled beneficiaries even if they are resident here and receive distributions or benefits in the UK.

Equally, a non-domiciled settlor who retains an interest in an offshore trust will have no UK tax liability in respect of trust gains, even if he is UK resident.

These rules are now set to change. The new rules will significantly curtail the advantages that non-domiciled individuals have previously been able to exploit through the use of offshore trusts. The new rules represent both an opportunity and a threat. In certain well defined circumstances there are continuing benefits to be obtained from the use of existing offshore trust arrangements (and indeed through the creation of new offshore trusts).

However all offshore trust arrangements need to be carefully reviewed so as to determine whether they are effective under the new rules.


1. Salans LLP is a Limited Liability Partnership registered in London with Registration Number OC 316822. Registered Office: Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ, UK. Regulated by the Solicitors' Regulation Authority. A list of members of Salans LLP is available at the above Registered Office.

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.

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