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The Tax Benefits of Non-Domiciled Status for UK Residents

Gary Green
Gary Green
August 12, 2021

Having a Non-Domiciled Status if you reside in the United Kingdom can have great benefits for tax purposes.

The outcome of the June 2016 referendum, which turned out to be in favour of the United Kingdom’s leaving the European Union, had quite a vast impact on the fiscal policy and the economy of the British Empire.

By the end of 2016, the United Kingdom had a new financial amendment bill ready to be incorporated into the UK’s constitution. Part of this amendment bill comprised a completely new taxation policy for the country. You may view a PDF file containing the Draft provisions for the new Finance Bill 2017 here.

A large part of the new financial law relates to the manner in which UK residents who do not have a UK domicile are taxed.

“Non-domiciled” means that, even though a person may permanently live in the country, ie is ‘resident’, such a person does not carry a UK Citizenship and therefore does not have a valid - or legal - domicile within the Kingdom. A domicile is essentially where someone is born and raised. A UK resident without a legal UK domicile is referred to as a non-dom- or a non-domiciled resident.

The new Finance Bill came into effect on 6th April 2017.

Impact of the New Finance Bill on the Remittance Basis of and Other Tax Benefits for Non-Domiciled Individuals

Inheritance Tax (IHT) Benefits

Non-dom residents have the benefit that they are only taxed on inheritance assets that are located within the borders of the UK. Any inheritance assets that they own outside the country are not subject to UK inheritance tax.

With the rate of UK IHT usually being 40%, the tax benefit for such an individual can be quite substantial.

Note however that, since 6th April 2017 when the new Finance law came into effect, the fifteen out of twenty-year rule is applied where a non-dom resident is deemed resident after having lived in the country for fifteen of the preceding twenty years.

Also note that, once a person has been a non-UK resident for at least four consecutive UK tax years deemed domicile for inheritance tax purposes is lost.

Planning for Deemed Domicile

Non-domiciled residents who are nearing their 15th year of UK residence (including part years of residence) could consider creating a trust abroad. Assets (with the exception of UK residential property or UK situs assets) established upon trust before the resident becomes deemed domiciled will continue being exempt from UK IHT. It is important to plan the status of any offshore assets timely and carefully.

Under the new law, trusts will make available a basis for offshore revenues and assets. This will allow tax-free accumulation of any such assets, even after the onset of the “deemed domiciled” status, as long as neither the settlor, nor his/her spouse, nor any of his/her minor child will earn any income from such trust. Also, any additions made after the settlor has been deemed domiciled, the arrangement will be nullified.

Remittance Basis: Income and Assets Not Generated or Obtained Locally

If someone resides in the United Kingdom but is a non-domiciled person, such a person may select to be taxed on a remittance basis.

The remittance basis of tax limits the individual’s tax responsibility to revenue and assets sourced and/or acquired within Britain. Any revenues and assets not sourced and/or acquired within the United Kingdom, and also that are earned while UK resident, but that are brought into the country by the non-domiciled individual, will also be taxed.

Considering the above, therefore, all revenue and assets that were not sourced and/or acquired within the borders of the UK, and that are kept outside of the borders of the country, such as any amounts kept in a bank account outside the country, will be tax exempted.

Naturally, taking all of this into consideration, being taxed on the remittance basis holds great financial benefits to the non-domiciled resident who has a significant number of offshore assets and a substantial amount of non-UK sourced money in bank accounts around the globe.

The tax planning opportunities for such individuals are vast. Also, subject to clauses preventing the individual to illegally avoid tax, should a non-dom resident be able to lawfully organize their matters in such a way that their revenues are allocated outside the Kingdom, he/she could benefit even more.

After a taxpayer has been a UK resident for seven out of nine tax years they no longer have the option to claim the remittance basis automatically. Instead, a non-domiciled resident may have to pay a charge to be eligible to claim the remittance basis. This is called the remittance basis charge. Compared to the amount that he/she may save on his tax, the payable charge can be rather insignificant, depending on his/her particular circumstances.

Principal Groups of Remittance Basis That Claimants Can Benefit From

  • Unremitted revenues and assets not generated in the country to a maximum of £2,000: This may be stated as “free of charge” irrespective of the number of years an individual has been living in the country.
  • Where someone has been resident for less than 7 of the preceding 9 years: overseas income may also be stated as “free of charge.”
  • Where a resident has been in Britain for more than 7 of the 9 preceding years, a charge of £30,000 will be payable in order to claim the remittance basis.
  • Where a resident has been in Britain for more than 12 out of the past 14 years, a charge of £60,000 will be payable in order to claim the remittance basis.
  • Where a resident has been in the United Kingdom for more than 14 years, they will be deemed domicile and can no longer claim the remittance basis.
  • Remittance basis claimants no longer benefit from UK tax free allowances either.

Conclusion

Many people are enticed to exchange their current life for a better life elsewhere and choose a life in Britain.

There are various reasons for this, such as economic and political stability, excellent schools, etc

Additionally, the fact that they can have access to a beneficial tax system due to their non-UK revenue and assets, can result in a low general tax rate.

The non-domiciled system has become a compound part of the UK tax legislation. Should an individual consider life in the United Kingdom, he/she will have to obtain advice from a financial expert and tax advisor since every case will be different to their circumstances.

If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 02037 282 848.

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