Individuals who are UK resident but not domiciled in the UK (non-doms) can benefit from being taxed on the remittance basis of taxation. More information on the remittance basis can be found in our tax factsheet. In this article, we discuss the key deadlines for non-doms, and what actions they may wish to take before each.
Becoming UK resident
Arguably the most important deadline to be aware of, and one which is often missed by non-doms moving to the UK. The UK tax year runs from 6 April to 5 April, and it is almost always preferable to complete any residence-related planning by 5 April prior to the commencement of fiscal residence.
Firstly, the individual should ascertain when they will become tax resident. Under the UK’s Statutory Residence Test, an individual is normally resident or not for a whole tax year. This means that an individual could potentially become resident on 6 April, despite physically moving to the UK at a later date.
If certain criteria are met, an individual may qualify for split year treatment, which means that the UK tax year will be split into a non-UK part and a UK part. If an individual is relying on qualifying for split year treatment, it is important to take advice on this before 5 April, so as to ensure that they meet all the necessary criteria. The date on which the UK part of the year commences may also be different from the date on which the individual moves to the UK.
Once an individual knows when they will become UK resident, the actions they may wish to take in advance of residence may include the following:
- Realising income and capital gains prior to becoming UK tax resident (although this may depend on the tax position in the country the individual is moving from).
- Disposing of investments which may give rise to unfavourable tax treatment in the UK.
- Structuring bank accounts to ensure that remittances can be made to the UK in the most favourable way.
It is also advisable for individuals moving to the UK to discuss the position with advisors in the jurisdiction they are leaving and any other jurisdictions where they have assets/investments. This will ensure that all parties are aware of the move and can advise accordingly.
Individuals who were born in the UK with a UK domicile of origin will be deemed to be UK domiciled from the date they become UK resident. Specific advice should be taken by such persons.
Becoming liable to the remittance basis charge
For the first seven years of UK residence, a non-dom can elect to be taxed on the remittance basis without incurring a cost, other than the loss of their income tax personal allowance and capital gains annual exemption. However, once they have been resident for at least seven out of the previous nine tax years they will need to pay an annual ‘remittance basis charge’ of £30,000 in order to continue claiming the remittance basis of taxation. The charge increases to £60,000 when they have been resident for at least twelve out of the previous fourteen tax years.
Whether it is advantageous to continue to be taxed on the remittance basis will depend on the level of the individual’s foreign income and gains, the availability of foreign tax credits, and whether or not they intend to remit their foreign income and gains to the UK (in which case, it will be taxable anyway). It is possible to choose whether to be taxed on the remittance basis on a year-by-year basis, and therefore an individual can make a claim in one year (for example, because they realise a one-off, significant foreign capital gain) but not the following tax year.
If it is still preferable for an individual to be taxed on the remittance basis and pay the remittance basis charge, the main consideration is likely to be what source of foreign income or gains the individual should ‘nominate’ for the purposes of the remittance basis charge. It is necessary to nominate at least £1 of income/gains to which the remittance basis charge is deemed to attach.
If an individual remits nominated income/gains, this will trigger unfavourable remittance ordering rules, although there is a de minimis exemption where the aggregate nominated income is less than £10. For this reason, it is usually advisable to nominate only £1 each tax year. However, some individuals (for example US citizens) may need to nominate more foreign income/capital gains in order to ensure that the remittance basis charge is available as a foreign tax credit in another jurisdiction.
If an individual decides to switch to taxation on the arising basis, they may wish to restructure their bank accounts. In particular, as they will be paying UK tax on their foreign income/capital gains going forward, they will be able to remit this to the UK without incurring an additional tax charge. However, if they remit foreign income/capital gains which first arose in earlier tax years for which they claimed the remittance basis, further tax will be due.
Individuals becoming subject to the remittance basis charge may also wish to consider simplifying their sources of income/capital gains in order to streamline their UK reporting. They may also wish to consider the use of offshore trusts.
Individuals should review their position before the end of both their seventh and twelfth tax years of UK residence.
A non-dom will be deemed to be domiciled in the UK (deemed-dom) once they have been UK resident in at least fifteen of the previous twenty tax years. From the beginning of the sixteenth consecutive tax year the individual will be taxed on their worldwide income and capital gains. In addition, their worldwide estate will come within the scope of inheritance tax.
If an individual wishes to leave the UK before they become deemed-dom, they will need to depart before the end of their fourteenth tax year of UK residence. If they leave during the fifteenth tax year, they will still be deemed-dom the following tax year (year sixteen) even though not UK resident in that year. This may not be of concern for income tax and capital gains tax purposes, but will have an impact on the inheritance tax position.
If the individual is going to remain in the UK, they will need to review their worldwide assets and sources of income to establish what the UK tax position will be.
Many individuals look at setting up trusts which can benefit from protected status. Where an individual has previously set up a non-UK trust, they may wish to review the structure to ensure protected status is maintained.
As for individuals switching to the arising basis due to the remittance basis charge, individuals becoming deemed-dom may wish to review their overseas bank accounts to ensure that these are structured in a tax efficient way.
Those shortly to become deemed-dom may also wish to consider realising foreign income/capital gains whilst they can still claim the remittance basis, and rebasing their assets for capital gains tax purposes.
Finally, individuals may wish to make gifts of overseas assets whilst such gifts are outside the scope of inheritance tax.
Acquiring a domicile of choice in the UK
If a non-dom forms an intention to remain in the UK permanently or indefinitely, they may acquire a domicile of choice in the UK. In such a case, the way in which they are taxed may change, even if they are already deemed-dom for UK tax purposes.
If an individual takes steps with a view to acquiring a domicile of choice in the UK, arguably they may already have acquired such a domicile and the scope for planning may be limited. It is important to record when the individual’s intention changed, and why. This will be central to establishing when the individual acquired their domicile of choice in the UK.
Secondly, they should review how they will be taxed once domiciled in the UK. In particular, trusts which previously benefited from ‘protected’ status will no longer enjoy this status. An individual acquiring a domicile of choice in the UK may therefore wish to be excluded from benefiting under trusts they settled. The trustees may also wish to review their investment strategy.
Other occasions to review
In addition to the above-mentioned events, a review of the tax position may also be appropriate in the context of significant events such as:
- The birth of a child.
- A child reaching the age of majority.
- The receipt of an inheritance.
In addition, changes in tax law can trigger a need to review a non-dom individual’s tax position.
The UK taxation of non-doms is a complicated area of tax law and it is important for non-doms to receive regular tax advice.