The UK tax code provides a preferential tax regime for those who are resident but considered non-UK domiciled. Although considerable changes have been made to the rules in recent years, it still remains a very attractive proposition for non-UK domiciled individuals coming to live in the UK from abroad.
What is a non-domiciled individual?
Domicile is a distinct and separate concept from residence. A person’s domicile may be thought of as his or her jurisdiction of origin, where he has permanent and enduring family ties, rather than merely the place where he or she happens to be resident, even if that period of residence has lasted for many years. An individual’s domicile of origin is normally (with some exceptions) inherited from his or her father.
It is relatively difficult in English law to change one’s domicile of origin, regardless of where one chooses to live or how long one has lived there. The UK Courts have generally only recognised a change of domicile where one cuts all ties with the home country (including the sale of investments and homes, cessation of club and professional memberships etc. etc.) and intends to remain permanently in the country of residence.
The onus of proof in demonstrating that a taxpayer has obtained a UK domicile of choice is on the UK tax authorities. In practice, it is unlikely that a person born outside the UK will ever become domiciled in the UK under general law unless they show clear intention to spend the rest of their life there.
The most significant change to the non-domicile regime, with will take effect from 6 April 2017, is that those who have been UK resident for 15 of the previous 20 tax years will be deemed UK domiciled for all tax purposes. Currently, deemed domicile applies only for Inheritance Tax purposes and only for those who have been UK resident for 17 of the previous 20 tax years. This means that the favourable non-dom tax regime will no longer be available indefinitely.
However, 15 years provides a considerable window of opportunity. Indeed, many non-doms do not intend to stay in the UK beyond 15 years. For those who will stay beyond 15 years, non-UK resident trusts established before becoming deemed domiciled offer tax deferral and/or exemption opportunities. Finally, remaining non-UK resident for six complete tax years will restart the 15-year clock for the deeming of domicile.
What are the tax advantages for a non-domiciled individual?
Remittance basis for non-UK income and gains
Non-domiciled individuals resident in the UK may choose, on an annual basis, to be taxed on the remittance basis. The remittance basis of tax restricts the UK tax liability to UK source income and gains, plus any non-UK source income and gains brought into (remitted) to the UK. Thus, any non-UK income and gains retained outside the UK (for instance in an offshore bank account) will not be taxed. This is a major tax incentive for those with significant sources of income outside the UK, or those that (subject to anti-avoidance provisions) can legitimately arrange their affairs such that income is payable outside the UK.
Under certain circumstances there is a “charge” to access the remittance basis of taxation, although this can be insignificant when compared with the overall tax savings, depending on the individual circumstances. The main categories of remittance basis claimant are:
- Those whose unremitted non-UK income and gains in the year are less than £2,000. These may use the remittance basis “free of charge”, regardless of how many years they have been resident in the UK.
- Those who have been resident in the UK for less than 7 out of the previous 9 tax years. Use of the remittance basis is again free of charge, except that the annual income tax and capital gains tax allowances cannot be claimed where non-remitted non-UK income exceeds £2,000.
- Those who have been resident in the UK for more than 7 of the 9 previous tax years but less than 12 out of the last 14 tax years. These must pay a charge of £30,000 in any year in which they wish to access the remittance basis.
- For those who have been UK resident for 12 years or more in the last 14 tax years must pay a charge of £60,000 in any year in which they wish to access the remittance basis.
- Currently, there is also a £90,000 charge to access the remittance basis for those who have been UK resident for 17 of the previous 20 tax years; however, this will disappear from April 2017 when those who have been resident for 15 of the previous 20 tax years will become deemed domiciled for all tax purposes.
Many UK resident non-domiciled individuals will wish to bring some non-UK income into the UK in order to fund their lifestyle and / or purchase property. With careful planning, the UK tax on such sums can be reduced or eliminated.
The definition of a taxable remittance in the UK tax legislation is very widely drawn. As a result there are several important tax planning steps to be put in place and it is preferable for these to be addressed before relocating to the UK where possible. We work with clients to ensure they have properly structured bank accounts and access to a pool of (non-taxable) core capital wherever possible.
In addition, there is now a significant relief available to non-domiciliaries who remit taxable funds to invest in a UK commercial business. Providing certain conditions are met (such as benefits received from the business are no more than the commercial rates, and that funds are invested in good time) such remittances will not be taxable. This even applies to investments in an individual’s own company and extends to a business of letting commercial property.
The use of gifts and loans can also be considered in appropriate circumstances to mitigate the UK tax charge on remitting funds to the UK.
Inheritance Tax (IHT) benefits
Non-domiciled individuals also have the advantage of beneficial treatment for UK IHT purposes. Only assets situated in the UK are subject to UK IHT for such individuals; non-UK assets are excluded. The rate of UK IHT is typically 40%, which means this can be a significant benefit.
Currently, individuals who have been UK resident for 17 out of the previous 20 tax years are deemed domiciled for IHT purposes, and liable in principle to IHT on their worldwide assets. Under the new rules due to take effect from 6 April 2017, deemed domicile status will be acquired once the 15 out of 20 year rule is met.
Deemed domicile for inheritance tax purposes is lost once an individual has been non-UK resident for at least four consecutive UK tax years.
We have helped our clients make use of IHT treaties between the UK and other jurisdictions, particularly Italy, France and India, allowing significant tax savings even where they have already become deemed domiciled.
Planning for Deemed Domicile
Individuals who are nearing their 15th year of UK residence (including part years of residence) should consider settling an overseas trust. Assets (with the exception of UK residential property) settled upon trust before becoming deemed domiciled will remain outside the UK IHT net indefinitely with careful and timely planning.
In addition, under the proposals due to come into effect from 6 April 2017, trusts will provide a shelter for overseas income and gains, which will be able to roll up tax free, even after the settlor has become deemed domiciled, provided that no benefits are received from the trust by the settlor, their spouse or minor child, and no additions are made to the trust after the settlor has become deemed domiciled.
Many people are attracted to life in the UK for a variety of reasons such as economic and political stability, world-class schools and access to financial markets. In addition to this, they can typically enjoy a privileged tax regime in respect of their non-UK income, gains and assets, which can result in a low overall tax rate.
The non-dom regime is a complex area of the UK tax legislation and advice needs to be taken at the earliest opportunity so that appropriate structuring can be put in place to mitigate future income tax, capital gains tax and inheritance tax. Verfides can help clients structure their affairs from the outset and can work with clients to achieve an optimum UK income and asset base whilst protecting non-UK income and gains from UK taxation.