TT120: Non-Domiciled Rules

July 23, 2008

There has been considerable media publicity about the proposals to amend the UK taxation policy in respect of individuals who are not domiciled in the UK (so-called non-doms). The proposals first announced in the Pre-Budget statement in October 2007 have now been published in a considerably revised form in the Finance Bill. They may still not be in their final form but it is clearer how they are likely to apply.

What is a non-dom?

Domicile is a general law concept. It is not the same as residence (see Topical Tips 118), which is determined by presence in the country. Domicile is a much more complex affair. Everyone has what is known as a domicile of origin, which is determined by the place in which their father was domiciled at the time of their birth. This may not be the same as the actual country in which they were born. For example, a child born in the UK to a father who was domiciled in India would have an Indian domicile of origin. Similarly a child born in France to a father who was domiciled in the UK would have a UK domicile of origin.

A ‘non-dom’ in the context of UK taxation is therefore someone resident in the UK whose domicile of origin is not the UK.

Where someone moves to a new country and decides to reside there indefinitely with no intention of ever leaving, then it may be argued that they have acquired a ‘domicile of choice’ in that country. Every situation must be looked at by reference to the specific facts and it is important to note that the onus of proving a change of domicile always rests on the person who claims the change.

What are the tax advantages of being a non-dom?

The domiciled individual is taxed on income and gains as they arise in each tax year. The non-UK domiciled individual has only been taxed on those sums to the extent that they have actually brought them into this country (this is referred to as the ‘remittance basis’).

The non-UK domiciled individual who is resident in the UK for tax purposes has thus been able to enjoy a considerable tax advantage over the resident and domiciled individual. For example, if a non-UK domiciled individual had investment income of £20,000 arising outside the UK in a tax year and only transferred £1,000 of that into the UK they would only be taxed on the £1,000. There were a number of planning routes open which allowed the nature of remittances to be planned so as to minimise the impact still further.

What is the change?

The fundamental change is that from 6 April 2008 all UK resident individuals will be taxed on their worldwide income as it arises irrespective of their domicile unless they claim to be treated under the remittance basis.

Who can make the claim?

The opportunity to make the claim to the remittance basis is open to any individual who is not domiciled in the UK or is not ordinarily resident in the UK. If the claim is made they will pay tax only on the income and gains which they actually remit to the UK in the tax year concerned. There is a downside in that they will lose entitlement to personal allowance for income tax purposes and the annual capital gains tax exemption. The decision whether or not to claim the remittance basis can be made each year and so it is possible to move in and out of the basis to secure the best tax position.

A £30,000 charge

A £30,000 remittance basis charge will be levied in addition to any tax on remittances in situations where the person making the claim for remittance basis has been resident in the UK for at least seven out of the nine years preceding the year of claim. It will not be applied where the individual is under 18 years of age throughout the relevant tax year.  Years of residence before 6 April 2008 will be counted and any year where an individual was resident for just part of a year will count as a full year. Anyone who has been continually resident since 6 April 2001 will have to pay the remittance basis charge from the outset.

Where the £30,000 charge has to be paid, the individual must nominate part of their overseas income and gains on which the sum will represent the tax due. If and when that particular income or gain is remitted to the UK it will not be chargeable to tax. The charge will also be available for relief under most double tax treaties that the UK has with other countries.

Exemption from the £30,000 charge

If an individual remits to the UK all the income that arises in a year, or only leaves up to £2,000 unremitted, then they may have the benefit of the remittance basis without having to make a claim and without having to lose personal allowances or pay the £30,000 charge.

How are remittances calculated?

The rules on identifying and calculating remittances are being overhauled and all the old planning routes appear to have been blocked off. At the most basic level, there will now be a remittance if an overseas income is used to purchase an asset such as a car and then bring the asset into the UK for personal use. Previous practice of using remittances from ceased sources and the practice of making gifts outside the UK to individuals who then remit are also being blocked off.

The changes in this area represent the most significant overhaul of the taxation of non-UK domiciled individuals for decades and very careful planning is now going to be needed to ensure the most efficient approach is taken.

Barnes Roffe Topical Tips:

  • Check any advantages or disadvantages under the new rules
  • Be aware certain domiciles such as India or Pakistan give Inheritance Tax (IHT) and other advantages
  • Individuals with less than 17 years residence in the UK (see TT118 for details or residence) need to be especially careful when reviewing IHT
  • It is essential to seek specialist advice in this complex area.
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