07718128235
omar@aswatax.co.uk
07718128235
omar@aswatax.co.uk
May 15, 2024

What International Clients Need to Know About Non Domicile Tax Status in the UK

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Thinking about setting up shop in the UK, or perhaps you're already there? 

For international individuals, the UK tax system can feel like a labyrinth. In fact, almost every country’s tax system feels like that to the average individual.

But you need not be afraid. This is why we create posts like this to help you find your way through the system.

There's a special tax status called "non-domicile" that can significantly benefit those who qualify.

In this blog post, we are going to delve into the world of non-domicile status in the UK and explore how it can impact your tax bill.

Are You ready? Let’s go!

What is Non-Domicile Tax Status in the UK?

Non-domicile status in the UK refers to individuals who reside in the UK but do not consider it their permanent home.

Essentially, if your domicile of origin—usually the country your father considered his permanent home when you were born—is outside the UK, you might qualify as non-domiciled. This status affects how you are taxed on foreign income and gains.

Understanding the distinction between residency and domicile is essential:

  • Residency is determined each tax year and depends on how many days you spend in the UK.
  • Domicile is a broader concept reflecting a person’s long-term home intentions.

Imagine it as your true "home" country, even if you currently live elsewhere.

For example, an American entrepreneur who recently moved to London for business might be considered a UK resident for tax purposes, but their domicile of origin could still be the United States.

How Does Tax Planning Change for Non-Doms in the UK?

Obtaining non-dom status unlocks a unique tax planning advantage: the remittance basis. 

This means you only pay UK tax on income and capital gains that you bring into the UK (remit).

Any foreign income and gains you keep overseas are generally not subject to UK tax.

For instance, imagine a French investor living in London but managing her portfolio back in France. With non-dom status and the remittance basis, she wouldn't pay UK tax on the dividends her French investments generate unless she transfers those funds to a UK bank account.

Here’s how it changes:

  • Claiming the Remittance Basis: Non-doms can choose to be taxed on a remittance basis, meaning they only pay UK tax on foreign income or gains that are brought into the UK.
  • Capital Gains and Inheritance Tax: With careful planning, non-doms can mitigate potential liabilities on worldwide income and assets.

Strategies include:

  1. Structuring your affairs to take advantage of the remittance basis.
  2. Making use of allowances and reliefs that apply specifically to non-doms.

What is the Remittance Basis of Taxation?

The remittance basis offers a fantastic perk for non-doms, but it's not automatic. 

To claim it, you'll need to file a self-assessment tax return and formally elect the remittance basis. 

It allows you to only pay UK tax on income and capital gains that are brought (remitted) into the UK. This means any foreign income or gains you leave overseas are generally not subject to UK taxation.

Here are a few reasons why choosing the remittance basis might be a wise move:

Benefits of Choosing the Remittance Basis:

  • Reduced Tax Bill: You only pay tax on income and capital gains brought into the UK, potentially saving you a significant amount.
  • Greater Financial Flexibility: Manage your overseas income without immediate UK tax implications.
  • Potential Inheritance Tax Advantages: Non-dom status can offer benefits for inheritance tax planning on non-UK assets.

However, claiming the remittance basis may involve losing some UK tax allowances and could lead to the remittance basis charge if you have been a UK resident in many of the previous years.

Therefore, understanding and navigating this choice is a crucial aspect of tax planning for non-doms.

How Can Non-Domiciled Individuals Claim the Remittance Basis?

Claiming the remittance basis is a key strategy for non-domiciled individuals looking to manage their tax liability. Here's a breakdown of the eligibility and process:

  1. Eligibility Criteria:
    • You must be a non-domiciled resident in the UK.
    • You should have foreign income or gains that you do not wish to bring to the UK.
  1. Step-by-Step Process:
    • File a self-assessment tax return and indicate your choice to be taxed on the remittance basis.
    • Forgo your personal allowance and capital gains tax exemption, which is a consequence of choosing the remittance basis.
    • Maintain detailed records of your foreign income and gains, as well as any amounts remitted to the UK.

Selecting the remittance basis could significantly reduce your tax bill, particularly if you have substantial income or gains outside the UK that you do not remit.

What are the Implications of Capital Gains Tax for Non-Doms?

Capital Gains Tax (CGT) applies to profits made from selling assets like property or investments. 

Let's see how the remittance basis affects CGT for non-doms:

  • Non-Doms on the Arising Basis: You are taxed on worldwide gains, regardless of whether the gains are brought into the UK.
  • Non-Doms on the Remittance Basis: You only pay CGT on foreign gains if they are brought into the UK, potentially saving a significant amount in taxes.

Understanding these rules can help in planning your investments and managing potential tax on capital gains, ensuring you maximise the benefits of your non-dom status.

How Does Inheritance Tax Affect Non-Domiciled Residents?

Inheritance tax (IHT) is another area where non-domiciled status plays a crucial role. 

Inheritance Tax (IHT) is levied on the value of your estate when you pass away. Here’s what you need to know:

  • Domicile of Origin: If your domicile of origin is outside the UK, you're generally not liable for IHT on assets located outside the UK.
  • Length of UK Residence: The longer you've been resident in the UK, the more complex the IHT rules become. There are special rates and exemptions for certain categories of non-doms who haven't been resident in the UK for a long time.

Planning for a Smooth Inheritance

Here are some tips for non-domiciled individuals to consider regarding IHT:

  • Domicile Planning: Understanding your domicile status and taking steps to solidify your non-domicile ties can be beneficial for IHT purposes.
  • Gifting Strategy: Gifting assets to beneficiaries while you're alive can be a way to reduce your IHT liability. However, complex rules apply, so seek professional tax advice.

Read this post for more information about Inheritance tax 

Key Takeaway for Business Owners

If you're a non-domiciled business owner operating in the UK, your business income will likely be considered UK-source income and therefore subject to UK tax regardless of the remittance basis.

However, there might still be tax planning opportunities available depending on the structure of your business.

Consulting a tax advisor specialising in non-domicile tax is highly recommended.

Conclusion

For international clients living or working in the UK, understanding the nuances of non-domicile tax status is essential. 

This status affects various aspects of taxation, from income to inheritance taxes, and requires careful consideration and planning.

By staying informed and seeking expert tax advice, you can navigate the complexities of the UK tax system with confidence.

Thanks for reading!

Meet Omar

Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Omar and ASWATAX can do for you.

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