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Taxation – Residence And Domicile

Some UK resident but non-domiciled individuals can elect to be taxed on their overseas income and gains on a remittance basis. Those who do not elect are taxed on their worldwide income and gains on an arising basis.

Non-UK domiciled individuals are deemed UK domiciled if they have been resident in the UK for 15 of the past 20 tax years and the remittance basis is no longer an option.

In addition individuals who were born in the UK and who have a UK domicile of origin revert to their UK domiciled status whilst they are resident in the UK.

Individuals who can use the remittance basis are charged according to how long they have been UK resident.

The charge is £60,000 for those who have been UK resident for at least 12 of the previous 14 tax years.

A £30,000 charge applies to those who have been resident for at least 7 of the preceding 9 tax years.

The tax charge will be removed when non-domiciled individuals remit foreign income or capital gain for the purpose of a qualifying investment in a qualifying company.

The rules relating to residence and domicile involve some quite complex tax principles, which have a potentially significant impact on a wide range of individuals and their tax liabilities. Contact us to discuss your own situation.

Rules relating to residence and domicile

The concept of residence in the UK for tax purposes determines to what extent an individual is liable to UK tax on their income.

If you have UK income you may need to pay UK tax even if you’re non-resident, eg if you have income from renting a property in the UK. The UK has ‘double taxation agreements’ with many countries to make sure you don’t pay tax twice.

When an individual is UK resident for tax purposes, they are also liable for tax on income arising anywhere else in the world, and this holds true for all UK residents. Eligible non-doms can choose the remittance basis in order not to be taxed on all their foreign income.

However, the basis on which some are taxed differs – this affects the amount of income chargeable to tax in any tax year.

The rules require individuals to claim the remittance basis in future, and for long-term residents when the unremitted income or gains exceed £2,000, the remittance basis will only be available on payment of £60,000 (£30,000 in some cases) per annum.

So, a non-domiciled individual with £5,000 of overseas investment income would be liable to pay UK income tax on his overseas income, as it would not be worth him paying the £60,000 tariff to avoid it.

In addition, those who claim a remittance basis will also lose their UK personal allowances and CGT annual allowance. The loss of personal allowances and annual exemption will affect the tax bill on UK income, even if no foreign income is remitted to the UK.

The remittance basis will apply automatically if an individual’s non-UK income and gains are less than £2,000 in the year, and the individual will not lose his UK allowances in this situation.

If the individual wishes to claim the remittance basis on income in excess of £2,000, he will lose his personal allowances and CGT annual allowance.

This will apply to all of those seeking to be taxed on a remittance basis, whether they are required to pay the flat fee or not.

Finally, for those who meet one of the longer-term residence tests, a tax charge (as detailed above) will be due in addition to the loss of personal allowances.

Tax will also be due on remitted income in addition to the flat charge, and if income is remitted to the UK to pay the flat charge, then further tax will arise on that remittance.

Paying the remittance basis charge with foreign income and gains is not a remittance if the payment is made from funds held outside the UK, directly to HMRC by cheque (drawn on a foreign bank account) or an electronic transfer of funds.

The remittance basis charge counts as UK income tax paid for the purpose of Gift Aid.

Statutory residence test

A statutory residence test determines whether you are UK resident for a particular tax year. This comprises 3 elements:

  1. Is the individual automatically UK resident?
  2. Is the individual automatically resident overseas?
  3. If neither of these categories, are there sufficient ties to make them resident in the UK?

Please contact us to discuss your own situation with regard to your domicile and available tax planning opportunities.

This information is based on our understanding of current tax law and practice, which may change in the future. The way in which tax charges, reliefs and allowances are applied depends upon individual circumstances and may also be subject to change in the future. This document is solely for information purposes and nothing in this document is intended to constitute tax advice. You should take professional advice before making any tax planning decisions.