The UK tax code provides a preferential tax regime for those who are resident but not domiciled in the UK – often referred to as ‘non-dom’ status. Although considerable changes have been made to the rules in recent years, it remains a highly attractive regime for non-UK domiciled individuals coming to live in the UK.
UK residents are generally taxed on the arising basis of taxation – that is, all their worldwide income and gains are taxable in the UK, even if foreign income and gains have already been taxed in another country. In most cases, however, relief is given in the UK for foreign tax paid, either via the provisions of a Double Taxation Agreement (DTA) or via unilateral relief.
However, a person who is resident but not domiciled in the UK can choose to be taxed under a special regime, the ‘remittance basis’ of taxation, which enables them to access the following tax benefits:
- The remittance basis of taxation restricts the UK tax liability to UK-source income and gains. Non-UK source income and gains are not taxed in the UK, unless and until they are brought into (remitted) to the UK. Any non-UK income and gains that are retained outside the UK will not be taxed in the UK.
- No inheritance tax (IHT) liability for non-UK assets. Non-doms are only liable to UK inheritance tax on their UK assets. Additional planning can ensure that most UK assets (except for UK residential property) can also be removed from the scope of IHT.
For the first six years of an individual’s UK residency, there is no charge to claim the remittance basis of taxation but an annual charge, known as the ‘Remittance Basis Charge’ (RBC), is imposed for non-doms who have been resident in the UK for at least seven of the past nine years immediately preceding the relevant tax year. This is currently set at £30,000 per year. The RBC increases to £60,000 per year for non-doms who have been resident in the UK for at least 12 of the past 14 years.
A 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 the individual’s self-assessment tax return. Making the election means forfeiting a claim to both the personal income tax allowance and the annual exempt allowance for Capital Gains Tax (CGT).
All non-doms still have the option of paying income tax on all worldwide income and assets if the charge is greater than the tax advantage of using the RBC. The RBC does not apply if a non-dom has less than £2,000 unremitted foreign income and gains in a tax year or is under 18, no matter how long they have been resident in the UK.
Since April 2017, non-doms who have been resident in the UK for at least 15 of the past 20 years are ‘deemed’ to have become UK-domiciled and therefore lose the ability to claim the remittance basis of taxation. As a result, their worldwide income and gains will be subject to UK taxation and their worldwide assets will also be liable to UK Inheritance Tax (IHT).