Separating fact from fiction: How are non-doms taxed in the UK?

The position of non-domiciled UK residents, or 'non-doms' as they are sometimes known, has historically been a controversial one. That is in large part due to the public attitudes regarding tax law and policy and reactions to what can be, at times, oversimplification of the tax rules reported in the media. 

This is a complicated area of the UK tax regime and can be difficult to understand. In this article we will give a brief overview of how non-doms are treated for tax purposes in the UK.

Domicile is relevant to other legal questions, as well as tax, for example which legal rules apply to succession on a person's death when they have connections with more than one jurisdiction. This post will focus on the tax aspects of domicile.

Who is a UK resident non-dom (RND)?

As the name suggests a UK resident non-dom is someone who is resident in the UK but does not intend to live here permanently and so, crucially, is not considered to be domiciled here. Simply put, a person is usually domiciled in the place they were born or the place where they have made their permanent home. For some living in the UK, they will have plans to return to their country of domicile in the future and therefore will fall into this RND category.

This status has important consequences for tax purposes. Ordinarily when someone is resident in the UK they will need to pay tax on their worldwide income and any capital gains that they have. However, if someone happens to be a UK RND then, subject to meeting certain criteria, they have the option of electing to be taxed using the 'remittance basis'.

What is the remittance basis?

Broadly, the remittance basis facilitates the taxation of UK income and gains of a UK resident non-dom, but UK tax will only apply to foreign income and gains to the extent that they are 'remitted' i.e., enjoyed or brought into, the UK.

What happens when the remittance basis is claimed?

A UK resident non-dom can claim the remittance basis for their first 7 years of residence in the UK, without charge. After this point, someone who is a UK RND, and who seeks to use the remittance basis, will need to pay a special charge of £30,000 (the "Charge") for each tax year that they seek to claim the remittance basis. This increases to £60,000 after 12 years of residence. It is important to note that once a person has been resident in the UK for 15 out of the last 20 years, they are automatically treated as domiciled in the UK for tax purposes and can no longer use the remittance basis, and will be taxed on their worldwide income and gains. Additionally, the Charge would need to be paid along with any tax on income / gains actually remitted to the UK. This means that the remittance basis will not be beneficial to all RNDs.

This is only one of the consequences that flow from claiming the remittance basis. Among others, a UK RND will lose certain allowances which may otherwise be available and may result in them paying higher rates of UK tax as a result. Furthermore, there will be associated professional and compliance costs to be met in using the remittance basis.

What happens to foreign income that is not remitted to the UK?

If the remittance basis is being used by a UK resident non-dom, then income or capital gains that are not remitted to the UK cannot be the subject of UK tax. It should be noted however that, the foreign income may be subject to tax in the relevant foreign jurisdiction. It is possible that the foreign income / capital gains would be taxed in a country that has different tax rates to the UK, and it may be more (or less) advantageous to the individual concerned. That would be entirely legal from a UK tax law perspective.

What is the key message?

It cannot be denied that the remittance basis does afford UK resident non-doms an advantage in that a portion of their wealth will not be subjected to UK tax. That said they will not be able to make use of those funds in the UK for the duration that the remittance basis is used, and they will need to incur costs in doing so. Under current legislation it is entirely legal and standard planning for a UK RND to claim the remittance basis to structure their affairs in a tax efficient manner. Whether that accords with public attitudes regarding tax planning is another matter entirely, and the two should not be confused.

If you believe you may benefit from claiming the remittance basis and would like to discuss this further, please get in touch.