Untangling Non Dom Status and the Remittance Basis – Navigating the complex world of UK Taxation

An introduction

Domiciliary status is normally based on the country of birth of the individual’s father but can change if a person has moved permanently to an overseas country and registered for domiciliary status, although this process can be complex and carries varied eligibility criteria.

In order to become a non-dom in the UK, an individual must provide evidence that they are not domiciled in the UK, typically by demonstrating that they have a more substantial connection to another country. The criteria used to determine an individual's domicile status include their place of birth, the location of their family and personal ties, and the country in which they consider themselves to be a permanent resident.

 
Under the UK tax system, non-doms are exempted from paying British taxes on income and gains earned from overseas sources, provided that such income is less than £ 2,000 per tax year and is not transferred to a UK account. Non-doms can, however, opt for the remittance basis, which allows them to pay tax only on income remitted to the UK, while all other gains and income remain untaxed. However, this comes with some limitations and may make the individual liable to pay an annual charge and may forfeit certain allowances.

Pros and cons of the remittance basis tax system

Claiming the remittance basis may be beneficial where there are tax efficiencies available to the individual. Claimants may need to pay an annual charge, as follows:

• £ 30,000 for non-doms resident in the UK for seven of the most recent nine tax years
• £ 60,000 for claimants living in the UK for 12 of the last 14 tax years

While some tax allowances remain for dual residents, where double tax treaties apply, many non-doms are unable to claim allowances for income tax and capital gains tax. The benefit is that non-doms can elect to pay taxes based on only UK derived income and gains, and any income or gains arising from overseas that are subsequently remitted to a British account.

The alternative is to pay tax as a UK resident, but non-domicile, through the standard arising basis. Taxable income can include employment earnings, foreign investment income, income from overseas rental properties, and pension income from funds based abroad.

Defining UK Tax Residency

Much depends on the applicants’ tax residency position, which depends on the amount of time they spend in the UK and in other countries, their ties to the UK (familial, business, property and others), and is normally determined through the automatic UK tests and sufficient ties tests, with tiebreakers applied where the tax position of the individual is still unclear.

In most cases, an individual will be treated as a resident, and liable for British taxes if:

• they live in the UK for at least six months of the tax year.
• their primary residence was UK-based for a simultaneous 91 days or more, and they lived or visited the property for 30 days or more within the tax year.
• they worked in the UK in a full-time position for any 365-day period, and one day of that period was within the relevant tax year.

The sufficient ties test looks at other criteria such as links to the UK through work, time spent and family members. Equally, criteria can determine whether an individual is a non-resident for tax purposes, including spending 16 days or less in the UK, or 46 days or less if the person has not lived in the UK within the three previous tax years. They may also be non-residents for tax purposes if they work full-time overseas for an average of 35 hours per week and spend less than 91 days in Britain.

Conditions for claiming the non-dom remittance basis

One of the flexibilities of the system is that claimants can decide year-on-year whether to make a claim, normally through the self-assessment tax return system. The loss of a personal allowance and capital gains allowance (respectively £ 12,570 and £ 6,000) may be worthwhile where the taxpayer has foreign income significantly over this value. However, it is important to review each case and tax year individually.
 

Using the Remittance Basis Without Claiming

There are two scenarios where a non-dom taxpayer can use the remittance basis without necessitating a claim:

• Foreign income and gains for the year are under £ 2,000, and unremitted. The remittance basis is automatically applied without impacting tax allowances.
• The non-dom has no UK-derived income or gains, up to £ 100, did not remit any foreign income to the UK, and has been a British resident for less than six of the last nine years.

In these cases, a self-assessment tax return may not be required unless there are other tax affairs that require a declaration to be made.

Tax rates for non-doms claiming the remittance basis

An individual claiming the remittance basis must declare and pay taxes on all income from overseas remitted to the UK. Capital that is transferred to the UK, but does not reflect income or gains, or that arose before the individual became a UK resident does not attract a tax charge, but separating offshore income and unrelated capital funds may be necessary.

Any foreign income that is transferred to the UK will attract income tax rates at 20 %, 40 % or 45 %, depending on the value, according to standard income tax brackets. The same rates are applied to overseas dividend income, which is not eligible for the reduced dividend tax brackets.

Particular attention is needed when ‘clean capital’, not derived from economic activities during the tax term, is transferred to the UK from the same account as other income sources. It is also important to ensure that you keep accurate records of all your overseas income and gains, as failing to do so can result in significant penalties. Tax legislation sets specific ordering rules that dictate how remittances are treated in respect of the values of varied income sources within the account.

The history of non-dom tax status and current situation

While an ongoing political topic, the domiciliary rules embedded into UK tax law have been part of the system since 1914 and are well established. Beforehand remittance-based tax payments were available to all taxpayers receiving income from overseas.

Abolishing the non-dom regime would potentially allow HMRC to levy taxes against the estimated £ 10.9 billion in capital gains and offshore income received by UK-resident non-doms, raising tax revenues of £ 3.2 billion.

However, there is the potential that those claiming the remittance basis, and in receipt of the highest levels of income, would choose to reside elsewhere to avoid significant changes in their tax obligations. 

Previous changes to non-dom taxation in 2017 led to a departure rate of 0.2 %, but politicians continue to debate issues around parity, where non-doms can relocate investments offshore to benefit from a tax exemption.

In the meantime, the criteria and checks applied can be rigorous, and the tax authorities will evaluate the definition of a permanent home, and any circumstances that may indicate that the intentions of the taxpayer are inconsistent with the intent of the remittance basis. HMRC may be unlikely to change the non-dom tax status exemptions for remittance basis claimants since these taxpayers contribute around £8 billion to the British economy through income tax, national insurance and capital gains taxes, and the effect of reform on a wider-scale basis is unknown. The argument in support of the remittance basis is around inviting investment and professional expertise to Britain, by making it a more attractive tax environment for high-net-worth individuals with global portfolios.