There are opportunities to legally reduce your tax liability by taking advantage of non-UK domicile status. Sarah Whalley, tax partner in our Manchester office, explores the advantages of non-UK domicile status for tax planning.
Tax planning is a crucial aspect of financial management. UK residents are subject to taxation on their worldwide income, but there are opportunities to legally reduce one's tax liability by taking advantage of non-UK domicile status.
Domicile is a legal concept that determines an individual's permanent home. There are three main types of domicile:
Domicile of origin: Typically acquired at birth and usually based on the domicile of one's father. It is the default domicile status.
Domicile of choice: This can be acquired when an individual moves to a new country with the intention of making it their permanent home. The subjective nature of acquiring a domicile of choice outside the UK can cause disputes with HMRC.
Deemed domicile: This status applies to individuals who have been UK residents for 15 out of the last 20 tax years. It can also apply to individuals that were born in the UK and had a domicile of origin in the UK, who return to the UK after having acquired a domicile of choice elsewhere. They will essentially regain their UK domicile status if they are resident in the UK for just one tax year.
Advantages of non-UK domicile status
Non-UK domicile status offers several key advantages to taxpayers:
Taxation on remittance basis
Non-UK domiciled individuals who are tax residents in the UK can choose to be taxed on the remittance basis. This means they are taxed on their UK income as it arises, but they will only be taxed on foreign income that is brought into (remitted to) the UK. Where the remittance basis is claimed, income and gains earned abroad but kept offshore are not taxed in the UK.
The remittance basis can also apply to earnings that relate to employment that has been exercised overseas. This is known as overseas workday relief and it applies to UK residents in their first three tax years of residence only.
Using the remittance basis is not without cost. Opting to use it is at the forfeiture of a taxpayers personal allowance and CGT annual exemption, unless the unremitted income and gains for a tax year is below £2,000. Furthermore, once a non-UK domiciled individual has been resident in the UK for seven tax years, they will be required to pay a charge to use the remittance basis, which starts at £30,000 per annum.
Whether or not the remittance basis creates a lower tax liability needs to be carefully considered year on year, taking into account the income and gain position for the year, the cost of using the remittance basis and consideration of the foreign tax credits which may be available.
Inheritance tax planning
Non-domiciled individuals are subject to UK inheritance tax in respect of their UK situated assets only. They can utilise offshore trusts and structures to mitigate UK inheritance tax on their overseas assets. With proper planning, it is possible to pass on wealth to the next generation whilst minimising the tax impact. Timing of such planning is key if it is likely that an individual who does not have a domicile of origin in the UK will become deemed domicile in the UK on a long term basis.
For those individuals with a UK domicile of origin who have moved overseas, they may wish to consider if they have done enough to gain a domicile of choice in their new country of residence, such that they have lost their UK domicile status as this will materially impact on their UK Inheritance Tax exposure, and if they have not, there are likely steps that can be taken to reinforce that change in domicile status.
How to make the most of non-UK domicile status
Seek professional advice: Given the complexity of the legislation which applies to non-domiciled individuals, it is crucial to consult with tax advisors and financial experts who specialise in non-domiciled tax planning. When using the remittance basis, it is important to understand what constitutes a remittance and how offshore income and gains are matched to such remittances, as, without planning, this will not generally be in the favour of the taxpayer.
Offshore investments: Consider offshore investments and ensure that separate offshore bank accounts are used to keep differing types of foreign income and gains separate, easily identifiable and outside the scope of UK taxation.
Utilise trusts: Trusts can be a powerful tool for inheritance tax planning. Non-UK domiciled individuals can create trusts to hold and protect their assets for future generations.
Keep detailed records and evidence of your intentions: Proper record-keeping is essential to prove the source of funds and assets to tax authorities, especially when claiming the remittance basis.
Stay informed: UK Tax legislation is subject to change, so it is important to stay up-to-date and be willing to adapt your tax strategy accordingly.
Non-UK domicile status can offer significant tax advantages to taxpayers. However, it is essential to navigate this complex area of tax carefully. By seeking professional guidance, individuals can legally minimise their UK tax exposure whilst safeguarding their wealth and assets for the future.
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.