UK Resident Non Doms: The Remittance Basis
If you are a non-domiciled resident in the UK, you may be able to pay tax on the remittance basis. The below article by Rebecca Sheldon (barrister at Old Square Tax Chambers) will summarise the following issues:
- What is a non-UK domiciliary?
- What is deemed-UK domicile in an income tax/capital gains tax context?
- What is deemed-UK domicile in an IHT context?
- Why is domicile important?
- What is the remittance basis?
- What is the remittance basis charge?
To instruct a barrister at Old Square Tax Chambers regarding your own tax matter, simply make contact with them today.
What Is a Non-UK Domiciliary?
In summary, this term refers to an individual who is domiciled outside of the UK. There are three types of domicile: a domicile of origin, a domicile of dependency, and a domicile of choice. A person may only have one domicile, which will (unless there is a domicile of dependency change) up until they are sixteen (or married, if earlier) be based on their domicile of origin. A “legitimate” child born during the lifetime of their father is domiciled in the country that their father is domiciled at the time of their birth. A “legitimate” child not born during the lifetime of the father, or an illegitimate child, will be domiciled in the country that their mother is domiciled in at the time of their birth.
The domicile of an unmarried legitimate child during the lifetime of their father will be the same as, and change with, the domicile of the father (i.e. a domicile of dependence). An unmarried illegitimate child and a child whose father is dead will in general be the same as, and change with, the domicile of the mother. If both parents are dead, or there is an illegitimate child without a living mother, then their domicile will probably follow their domicile of origin. This is unless the child is adopted, which means it will then follow the domicile of the adoptive parents.
However, an independent person (i.e. a person over the age of sixteen or married, if earlier) can also acquire a domicile of choice by intending to permanently reside (and actually residing) in another country. A domicile of choice can also be lost when a person ceases to reside there and by ceasing to intend to reside there permanently.
What Is Deemed Uk Domicile in an Income Tax/Capital Gains Tax Context?
Since 6th April 2017, individuals can be deemed to be UK domiciled where certain conditions are met. The first condition applies to formerly domiciled residents, who were born in the UK, had a UK domicile of origin, and where the individual is resident in the UK for the relevant tax year.
The second condition is if the person is UK tax resident for 15 of the previous 20 tax years. A tax year for which the individual is UK resident will count in full for deemed domicile purposes, even if the year is a split-year. Deemed domicile can come to an end in circumstances where a person ceases to be resident in the UK for at least 15 of the 20 tax years immediately preceding the relevant tax year, and, for at least one of the four tax years ending with the relevant tax year.
For children, UK resident years count towards the 15-year total even if they are under the age of 18. A child born in the UK who does not have a UK domicile of origin can therefore become deemed domiciled in the UK before they reach adulthood.
What Is Deemed Uk Domicile in an IHT Context?
For IHT, where a person was UK domiciled and then becomes domiciled elsewhere, if they die within 3 years of acquiring their domicile of choice, they are deemed to be domiciled in the UK.
A formerly UK domiciled resident will be deemed domiciled in the relevant tax year where he was born in the UK, had a UK domicile of origin, was resident in the UK for that tax year, and was resident in the UK for at least one of the two tax years immediately preceding that year.
A person is also deemed domiciled for IHT purposes if they are resident for 15 of the previous 20 tax years and, for at least one of the four tax years ending with the relevant tax year. Split years also count for this test.
Why is Domicile Important?
Domicile is important for UK tax purposes, including income tax and capital gains tax (as a result of the possibility of using the remittance basis of taxation, explained below), and for inheritance tax on foreign situated assets. People domiciled in the UK will pay inheritance tax on their estate, which includes their worldwide assets. Non-domiciled UK residents will only pay inheritance tax on the UK assets in their estate. A non-domiciled spouse may also elect to be domiciled in the UK for IHT purposes, which may be beneficial in certain circumstances due to then being eligible for the full spousal exemption on IHT rather being limited to an exemption of £325,000.
What Is the Remittance Basis?
There are two ways in which income tax and capital gains tax are assessed for tax purposes: the “arising” basis, under which tax is charged on all income and gains of UK residents, and the “remittance” basis, where tax is only charged on the amount of income and gains which are received in the UK.
A non-UK domiciled person who is resident in the UK may make a claim for the remittance basis to apply when they receive foreign income and gains (or deemed income and gains). This in short means they will only pay tax on their foreign income and gains if these are remitted (i.e. brought) to the UK. If you only have very small amounts of unremitted foreign and gains (i.e. less than £2000 per year), the remittance basis applies automatically.
There are however downsides to a claim, including the loss of personal allowances (both the capital gains tax annual exemption and the income tax personal allowance), remitted dividends being taxed at a higher rate than dividends taxed on an arising basis, and for long-term residents, the remittance basis claim charge (outlined in more detail below).
What Is the Remittance Basis Charge?
If you are a long-term UK resident and wish to pay foreign income tax on the remittance basis, you may be required to pay a remittance basis charge.
If you have been UK resident for 7 out of the previous 9 years, then there is a £30,000 annual charge. If you have been UK resident for twelve of the previous fourteen years, then there is a £60,000 annual charge. Whilst a person is under the age of 18, they will not pay the remittance basis charge, but the years they are in the UK will count towards the test.
You should therefore carefully consider whether the remittance basis will be a cost-effective choice for you.
f you would like to discuss the remittance basis with Rebecca Sheldon further, or you require legal assistance regarding your foreign income or capital gains, the barristers at Old Square Tax Chambers can assist you. Instruct them today.
Rebecca Sheldon
Old Square Tax Chambers
2nd May 2020
