UK residents are generally taxed on the arising basis of taxation – all worldwide income and gains will be taxable in the UK even if your foreign income and gains have already been taxed in another country. In many cases, relief is given in the UK for foreign tax paid on foreign income and gains under the provisions of the relevant Double Taxation Agreements (DTAs) or via unilateral relief.
If you are UK resident but not domiciled in the UK – often referred to as ‘non-doms’ – there are special rules that might apply to your foreign income and gains. You can choose, on an annual basis, whether to use the arising basis of taxation or the remittance basis of taxation on your UK self-assessment tax form.
The remittance basis of taxation is when you choose to be taxed only on your UK income and gains and only on foreign income and gains of £2,000 or more per year that you bring back to the UK.
For the first six years of UK residency, it is free to claim for the remittance basis but, from the seventh year of UK residency, if you want to enjoy this favourable treatment there will be an annual charge known as remittance basis charge.
The remittance basis charge is £30,000 if you have been UK resident but non-domiciled for seven out of the last nine years, rising to £60,000 if you have been resident for 12 out of the last 14 years.
Non-doms that reside in the UK for 15 or more years out of 20 are considered to be deemed UK domiciled and are no longer be able to pay the remittance basis tax charge, therefore their worldwide income and gains will be subject to UK taxation. Furthermore, their worldwide assets will also be liable to UK inheritance tax (IHT).
There are still opportunities to structure your financial assets to minimise your tax exposure. Excluded Property Trusts (EPTs) offer capital gains tax (CGT) and IHT planning opportunities for non-doms – especially those who have lived in the UK for less than 15 years but more than seven of the past nine years, and who are not able or willing to pay the annual remittance basis charge.
An EPT is typically a discretionary offshore trust, settled by a non-dom who has been resident in the UK for less than 15 years. The assets settled must be non-UK situs. Effectively an EPT offers permanent shelter from IHT, even if the settlor subsequently acquires a UK domicile or becomes deemed UK domiciled. Furthermore any gains made by assets in this form of trust – or made by any underlying offshore companies in the EPT – are generally not subject to UK CGT.
If you are residing in the UK or plan to move to the UK and have questions or concerns over your tax situation, contact Sovereign for a free initial consultation on your residency status and tax position in the UK.