Non-UK Domiciliary? Don’t believe everything you read in the press…

First published on 19 April 2022 by Alastair
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Just in case you haven’t noticed (we are pretty sure you will have, given the column inches assigned to the Chancellor’s wife’s tax arrangements), but the status of “non-doms” has been in the media a lot recently.  Although it has, unsurprisingly, been overtaken by events, notably some fines administered for breaches of Covid laws in a certain part of Westminster, it is still an important subject that, we suspect, will not go away, if only because UK governments of both major political stripes have encouraged it.   Sad to say, much of the mainstream media’s reporting has been, to be blunt, factually incorrect.

It's hard to say with precision just how many non-doms there are in Scotland.  An article in The Scotsman in 2015, suggested a figure of “several thousand,” most of whom were believed to be in finance or the oil industry. Across the UK as a whole, the Guardian quoted a 2018 figure of 238,000, up massively from 162,000 in 2001.  But just what is a non-domiciled (non-dom) person?

Basically, a non-dom is an individual who is domiciled outside of the UK – in other words, someone whose home is recognised for tax purposes as being outside this country. Basically, you acquire your domicile at birth from the domicile of your father.  Now it gets quite complicated…

More specifically, there are three types of domicile: a domicile of origin, a domicile of dependency, and a domicile of choice. Crucially, a person may only have one domicile, which will (unless there is a domicile of dependency change) up until they are sixteen (or married, if earlier) be based on their domicile of origin. Any “legitimate” child born during the lifetime of their father is domiciled in the country that their father is domiciled at the time of their birth. Any “legitimate” child not born during the lifetime of the father, or an illegitimate child, will be domiciled in the country that their mother is domiciled in at the time of their birth.

The domicile of an unmarried, legitimate child during the lifetime of their father will be the same as, and change with, the domicile of the father (this is known as a domicile of dependence). An unmarried, illegitimate child and a child whose father is dead will in general be the same as, and change with, the domicile of the mother. If both parents are dead, or there is an illegitimate child without a living mother, then their domicile will probably follow their domicile of origin. This applies unless the child is adopted, which means it will then follow the domicile of the adoptive parents.

All clear?  But…

An independent person (which means someone over the age of sixteen or married, if earlier) can also acquire a domicile of choice by intending to permanently reside (and actually residing) in another country. However, a domicile of choice can be lost when a person ceases to reside there and by ceasing to intend to reside there permanently.

Non-domiciled individuals who are resident in the UK can elect to be taxed on the remittance basis of taxation, as opposed to the usual arising basis. The remittance basis of taxation means you only get taxed on what you bring into the UK. In other words, those claiming the remittance basis will be subject to UK tax only on UK sourced income and gains, together with foreign income and gains which are remitted to the UK.

If that person does not make any claim for the remittance basis, taxation on the arising basis is the default position, subject to two exceptions noted below.

Claiming the remittance basis

As a non-dom, your decision on whether to make a claim for the remittance basis can be made on a year-by-year basis. The claim is usually made via your self-assessment tax return.

Anyone claiming the remittance basis will lose their entitlement to the personal allowance and capital gains annual exempt amount (which will remain £12,570 and £12,300 respectively until 2025-26) for the tax year in respect of which the remittance basis claim is made.

In most cases, taxpayers with foreign income exceeding the personal allowance will benefit from claiming the remittance basis. However, we would stress that each case needs to be reviewed on its merits. Individuals with income of more than £100,000 will suffer a reduction in the personal allowance of £1 for every £2 of income above that figure, irrespective of whether they have made a claim for the remittance basis.

Using the remittance basis without a claim

As noted above, there are two circumstances in which a non-dom can access the remittance basis without the need for a formal claim:

Firstly, where an individual’s unremitted foreign income and gains for the tax year are less than £2,000. In this case, the remittance basis applies automatically and there is no loss of the personal allowance and capital gains annual exemption. Furthermore, the £2,000 exception applies even where the individual concerned is ‘deemed domiciled’ for taxation purposes because they were resident in the UK for at least 15 of the preceding 20 tax years (of which more below).

The second exception applies to non-doms who have no UK income or gains in the tax year (other than taxed UK income of less than £100), make no remittances of foreign income or gains during the year, and have not been UK resident for more than six of the previous nine tax years. If you are in this category you don’t have to complete a self-assessment return for any other reason and no formal claim for the remittance basis is needed.

Definition of a remittance

Anyone claiming the remittance basis will only be taxed on foreign income or gains remitted to or enjoyed in the UK. Note that the definition of a remittance, for tax purposes, is wide ranging and so advice may well be required here.  The vast majority of non-doms are wealthy and have tax experts to advise them, but some may not (if this applies to you, we would be pleased to help). 

Rates of tax on remitted income

All income and gains remitted to the UK by any individual claiming the remittance basis are subject to UK tax. ‘Clean capital’ (offshore monies that do not represent non-UK income or gains arising after the commencement of UK residency) can be brought to the UK without a tax charge, and it is therefore important for remittance basis users to segregate their offshore income and gains from any clean capital funds. A minimum of at least three separate bank accounts should be maintained – one each for clean capital, income and capital gains.

Foreign income remitted to the UK will be taxed at non-savings income rates (currently 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for those with taxable incomes exceeding £150,000). This is the case even where the income remitted is dividend income, which if taxable on the arising basis would be charged at lower rates of 7.5%, 32.5% and 38.1% respectively.

If a remittance to the UK is made from an account containing a single source of income for a single year (or only clean capital), the composition of the remitted funds will be easily identified. However, remittances are often made from mixed funds, namely accounts containing a combination of income, capital gains and clean capital. Where a remittance is made from a mixed fund, the tax legislation stipulates specific ordering rules for the purpose of matching the remittance with monies comprised within the account. Again, these rules are and we suggest advice should be sought.

Long-term residents

Long-term UK residents (this applies to the Chancellor’s wife) who want to continue claiming the remittance basis must pay an annual remittance basis charge. Non-doms who have been resident in the UK for at least seven of the previous nine tax years must pay £30,000 per tax year: those who have been resident for at least 12 of the previous 14 tax years hae to pay £60,000. Given the level of the remittance basis charge, many non-doms can be better off foregoing a claim, opting instead to pay tax on the arising basis.

When a non-dom moves from the remittance basis of taxation to the arising basis, any foreign income or gains which originally arose in a year for which the remittance basis was claimed remain taxable if remitted in a later year.

Changes to the taxation of non-doms

Tax changes effective from 6 April 2017 restrict the availability of domicile-related tax privileges for income tax, capital gains and inheritance tax purposes. From that date, non-doms have been treated as domiciled in the UK for tax purposes where either:

They were born in the UK with a UK domicile of origin, and are UK resident for 2017-18 or any later year; or

They were UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year.

An individual meeting one or the other of these conditions is regarded as UK domiciled and therefore loses the ability to claim the remittance basis of taxation.

An individual who became deemed domiciled on 6 April 2017 under second of the above two conditions is entitled to rebase certain foreign assets to their market values at 5th April 2017 for the purpose of calculating the chargeable gain or loss arising on a later disposal of the asset. This is subject to a number of conditions, so, once again, we recommend seeking advice.

Vivian Linstrom, M&S Accountancy and Taxation

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