TT225: Non Dom

August 04, 2015
Company Law Update 2

Are non-UK domiciled individuals booking one way tickets out of the UK?

Since the recession, attention has fallen on groups who the media and politicians feel are not paying their ‘fair share’ of tax. One such group are non-domiciled individuals (“non-doms”) and the Chancellor of the Exchequer announced a number of proposals targeting non-doms in the Summer 2015 Budget. What determines an individual’s domicile and what is it about such status that gives entitlement to ‘favourable’ UK tax treatment?

What makes someone a non-dom?

Domicile is common law concept and is quite separate to residence and nationality. At birth, everyone acquires a “domicile of origin” which is usually the state your father considered to be his permanent home. It may have changed to a domicile of choice if you moved abroad and you don’t intend to return. However, determining someone’s domicile is not always that simple.

There are special Inheritance Tax (“IHT”) provisions that treat non-doms that have been resident in the UK for at least 17 out of the previous 20 years as UK domiciled (“deemed domicile”). The only way an individual can lose their UK deemed domicile status is by being non-UK resident for 4 tax years (“the 4 year rule”). This does not apply for common law purposes or for income tax and capital gains tax purposes (see below).

What are the IHT implications of being non-UK domiciled?

Domicile forms a crucial tenant for the purposes of IHT. If you are UK domiciled or deemed UK domicile, you will be generally liable to IHT on your worldwide assets (subject to some special provisions in some double tax treaties). However non-doms are only liable to IHT on UK situs assets owned personally (again subject to some special provisions in some double tax treaties) e.g. UK situated property and UK listed shares.

Many non-doms have exploited the IHT rules by using offshore structures such as companies and trusts to avoid IHT. Instead of owning the UK asset personally (most commonly UK situated residential property), the UK assets would be owned by offshore companies of which the individual is the main or only shareholder.

What are the Income Tax and Capital Gain Tax implications of being non-UK domiciled?

Individuals who are UK resident and domiciled in the UK are liable to tax on their worldwide income and gains. However non-doms who are resident in the UK can claim to be taxed on a remittance basis in respect of most non-UK source income and gains. This means they are only liable to tax on UK income and gains and overseas income and gains remitted to the UK. Unlike for IHT, a non-dom can claim such status for an indefinite period and therefore continue to claim the remittance basis regardless of the length of time they have spent in the UK.

This was seen to be unfair as non-doms can avoid paying UK tax on overseas income and gains, by not remitting those gains to the UK.

However, long term resident non-doms currently have to pay a charge (Remittance Basis Charge) to continue to benefit from the remittance basis of taxation. The remittance basis charge is currently £30,000 (for non-doms resident in the UK for 7 out of previous 9 years), £60,000 (for non-doms resident in the UK for 12 out of the previous 14 years) and £90,000 (for non-doms resident in the UK for 17 out of the 20 years). However if the unremitted overseas income and gains for the year is below £2,000, there is no remittance basis charge.

What are the Budget proposals aimed at non-doms?

One of the main changes to be introduced from April 2017 is to restrict non-doms from claiming the non-dom status for an indefinite period. Individuals that have been resident in the UK for more than 15 of the previous 20 years will be treated as UK domiciles for all tax purposes. The main impact of this will be as follows:

  • Their worldwide personally owned assets will be liable UK IHT.
  • From the 16th year of UK residence, long term non-doms residents will no longer be able to access the remittance basis of taxation and will be liable to UK tax on their worldwide income and gains.

The only way to lose the deemed UK domicile from April 2017 will be to leave the UK and spend more than 5 years outside the UK.

The second proposal to be introduced from April 2017 is aimed to make it harder for individuals who have a UK domicile of origin to claim non-dom status if they leave the UK and acquire a domicile of choice in another country and subsequently return to the UK. The proposed new rules will mean they are treated as UK domiciled for tax purposes on their return to the UK regardless of their domicile status under general law.

The third major proposal is to prevent non-doms using offshore structures such as companies and trusts to indirectly own UK residential property and stop the UK residential falling outside the IHT net. From April 2017, all non-doms will be liable to IHT on UK property even if it is held and owned through offshore structures. The aim is to ensure non-doms pay IHT on the value of UK residential property in the same way as UK domiciled individuals.

If you are non-UK domiciled and you would like to discuss the impacts of these proposals, please do not hesitate to contact us.

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