Non-Domicile Tax Rules For Expats

For expats in The Middle East, understanding the UK’s residence and domicile rules is very important when it comes to tax planning.

If you’re UK tax resident and UK domiciled you are subject to UK Income Tax and Capital Gains Tax on your worldwide income and gains as they arise. However, if you’re UK resident, but don’t have a UK domicile, you can use the remittance basis of taxation. This is an alternative tax treatment which means that you only need to pay tax on any income or gains generated in the UK. However, you do forfeit the right to use individual personal tax allowances if using this method. One advantage of this approach is that it allows you to claim ‘overseas workdays relief’; this excludes any overseas workdays from your UK tax bill during your first three years of UK tax residence. While you remain non-UK domiciled any of your assets outside of the UK won’t attract Inheritance Tax. However, the UK assets of a non-UK domicile do fall into the net of UK Inheritance Tax.

If you are UK non-resident and non-UK domiciled you’ll generally only be liable to Inheritance Tax on any UK assets you hold. In terms of Income Tax, you’ll just be charged it on any income you earn in the UK. Tax will also be payable on any sales of UK land and property and assets used in a UK trade.

What is a Non-UK domiciled individual?

A ‘non-uk domiciled individual’ or ‘Non-Dom’ refers to a UK resident whose permanent home, or domicile, is located outside the uk. This tax status is not determined by nationality or citizenship but by the individual’s domicile. Non-dom status can have implications on tax liabilities and is influenced by various factors, including where you and your parents were born.

Tax Planning For Non-Doms

As noted above, if you’re non-domiciled in the UK, it’s possible to use the remittance basis for tax planning purposes. Before you arrive in the UK, it’s important to structure any of your overseas accounts to take advantage of this approach. You may also want to shelter any offshore assets from UK Inheritance Tax. This needs specific planning, especially if you are likely to become classed as a UK resident for tax purposes by moving to the UK. Do also be aware that once you become UK tax resident, your non-dom status has a “shelf life”. Ultimately your non-dom status is time limited and will last for a maximum of 15 out of 20 years of UK tax residence, but you could become UK domiciled sooner than this. After this, you’ll become UK domiciled automatically and it won’t be possible to make use of the remittance basis. All assets owned anywhere in the world will then come within the scope of UK Inheritance Tax.

The Remittance Basis Of Taxation For Non-Doms

The remittance basis is a special tax treatment which allows non-doms who are UK tax resident to shelter overseas income and gains away from the UK Income Tax and Capital Gains Tax net. Using the remittance basis means you’ll lose any personal tax allowance unless your unremitted overseas income and gains are less than GBP2,000 in the tax year. It’s very important to structure your affairs sensibly as only your income and gains arising overseas (and remaining overseas) benefit from this remittance basis.

There are some areas to be aware of. For example, complex mixed fund rules apply to overseas accounts which are made up of different sources of income and gains. In addition, bringing any funds into the UK will likely attract UK tax.

It’s also worth considering your long-term plans as an annual £30,000 charge applies for using the remittance basis after seven out of nine years of UK tax residence. This charge increases to a hefty £60,000 after 12 out of 14 years of UK tax residence.

Non-Dom UK Income Tax Rates

Income Tax rates for non-doms are the same as for those who are UK domiciled. However, you may lose the opportunity to use your personal tax allowances if choosing the remittance basis. It’s worth bearing in mind that if you are remitting funds which have previously been sheltered from UK tax under the remittance basis the highest rates of Income Tax and Capital Gains Tax will apply.

Non-Dom Capital Gains Tax Rates

Capital Gains Tax rates are also aligned with UK domicile tax rates. The same rules apply as with Income Tax, with personal allowances at risk and the highest rates applying for remitted funds.

UK Inheritance Tax For Non-Dom Residents

Inheritance Tax generally doesn’t apply to any assets held outside of the UK as long as you are non-UK domiciled. Do bear in mind that you can become UK domiciled by choice or after you have been UK resident for 15 out of the last 20 years; whichever comes first, so some planning over the long-term will be needed. And if you originally had a UK domicile, but have swapped to a domicile of choice outside the UK, bear in mind that you are generally treated as UK domiciled if you are classed as resident in the UK for tax purposes.

How Do Non-Doms Declare And Pay Their Tax In The UK?

If you’re non-dom you can declare and pay any tax due by submitting a UK Tax Return. Tax is then paid through the Self-Assessment system. As before, it’s important to make sure that you claim the remittance basis of taxation on your Tax Return otherwise you’ll be charged UK tax on your worldwide income and gains for the entire tax year.

This is a complicated area of tax planning, and it is vital to speak to a tax professional with specific knowledge of expatriate situations. For help and advice please contact your nearest office.