Understanding Non-Domicile Status in the UK

Non-Domiciled Status

What is a non-domiciled individual?

A non-domiciled individual or ‘non-dom’ is a UK individual whose permanent residence, home, or domicile is outside the UK. This individual’s tax status is not determined by their nationality or citizenship but by the individual’s domicile.

Criteria to be non-domiciled in the UK

To obtain non-domiciled status in the UK, an individual must demonstrate to HMRC that their domicile is outside the UK. This can often be complex if an individual has significant ties to the UK, such as family connections, UK birth rights or property here.

How long can a non-domicile stay in the UK?

An individual’s non-domicile status lasts for a maximum of 15 out of 20 years of UK tax residence; after this period, an individual will automatically become a UK domicile and won’t be able to make use of any taxation advantages.

How does non-dom status affect UK tax obligations?

In the UK, non-domicile status significantly influences an individual’s tax responsibilities. Individuals with ‘non-dom’ status can avoid UK tax on their foreign income and gains, provided these are not brought into the UK.

If foreign income is below the £2,000 tax income threshold, it is tax-exempt unless remitted to the UK. The £2,000 income threshold is particularly relevant for lower-income households, as obtaining the non-dom status can lead to substantial tax savings on earnings abroad.

Those earning above the £2,000 threshold must report any foreign income to HMRC via a self-assessment tax return. The individual can pay UK tax on these earnings or opt for the remittance basis of taxation.

Claiming non-dom status enables individuals to substantially reduce potential Inheritance Tax (IHT) and Capital Gain tax (CGT) obligations. Non-domiciled individuals only pay IHT and CGT on UK assets, not assets disposed of or transferred abroad. Individuals seeking to dispose of foreign assets, transfer capital or sell foreign businesses could gain significant tax benefits, depending upon the tax obligations of the country in which these assets are held.

The Remittance Basis Of Taxation for Non-Doms

The remittance basis of assessment is an alternative tax treatment available to non-domiciled individuals in the UK. If a non-dom opts to be taxed on the remittance basis, they agree to pay tax on any foreign income or gains only if brought into the UK. Income and gains retained outside the UK are not subject to UK taxation under this rule.

If no claim is made, the default full UK taxation position is taken on any earnings sourced from the UK or abroad.

The main advantage of the remittance basis is that it aims to limit the UK tax liability on foreign income, which can be particularly beneficial for non-doms with substantial income or assets abroad.

Claiming the Remittance Basis of Taxation

An individual can apply for the remittance basis of taxation year-by-year by submitting their self-assessment tax return. The individual should specify their choice in the relevant section.
It is important to note that claiming the remittance basis may mean giving up certain tax allowances.

The claim process can be complex, so we suggest speaking to one of our qualified accountants for professional advice.

The Implications of Claiming Remittance Basis of Taxation

Loss of Personal Allowance

The 2023/24 UK personal income allowance provides a £12,570 tax-free allowance on UK taxable income. If individuals choose to claim a remittance basis of taxation, they forfeit their right to this personal income allowance. However, it is still possible for some dual residents to obtain this.

Capital Gains Tax

The current capital gains tax allowance for the 2023/24 tax year is £6,000. Opting for the remittance basis forfeits this exemption. While high-income taxpayers, whose CGT is 28% for residential property and 20% for other chargeable assets, may not feel a substantial impact, standard-rate taxpayers could face increased tax liabilities due to this loss.

Remittance Basis of Charge

An individual who chooses to opt for the remittance basis of taxation is additionally subject to an annual charge based on the time they have been a UK resident. HMRC defines this as an annual charge of £30,000 for individuals who have been a UK resident for more than seven of the last nine tax years or £60,000 for those who have been in the UK more than 12 of the previous 14 tax years.

Record Keeping

Maintaining accurate records is important when claiming the remittance basis of taxation. It is essential to track any overseas income or gains that haven’t been taxed in the UK. We offer professional bookkeeping services that can ensure records are kept in a clear and HMRC-compliant manner.

Overseas Workday Relief

The Overseas Workday Relief (OWR) is a tax relief available to UK non-domiciled individuals who have employment income from working both inside and outside the UK. The OWR is issued under specific criteria and enables individuals to pay UK income tax only on their employment income that relates to their UK workdays.

Any income from non-UK workdays falls outside the scope of UK income Tax and is not taxed under UK income tax rates (assuming any non-UK income isn’t transferred to the UK).

Overseas Workday Relief can significantly reduce the UK income tax liability for those who qualify. It is intended to make the UK an attractive destination for international professionals and encourage foreign investment.

Overseas Workday Relief Eligibility Criteria

Obtaining Overseas Workday relief can be a complicated process. To be able to claim, individuals will need to meet the following criteria:

• Perform some or all of their work duties outside of the UK.
• Be classed as a non-domiciled individual and be taxed on the remittance basis,
• Pay any foreign-earned income into a separate foreign bank account.
• Must have had non-UK resident status for the three tax years preceding the current year and be a UK tax resident in the year they claim OWR.
• Keep accurate and transparent records to prove that foreign earnings have not been remitted to the UK.

Offshore Banking

For non-domiciled individuals looking to claim Overseas Workday Relief, all foreign earnings should be paid into a non-UK overseas bank account. There is a risk that overseas income or gains could be taxed if brought into the UK; keeping overseas income in an offshore bank account makes it easier to prove this income has not been remitted and thus remains free from UK taxation.

To be eligible, the bank account must be in the individual’s name and contain no more than £10 at the beginning of the tax year to ensure clarity on the funds that are subject to tax. For transparency, it is advised that a separate bank account is opened each year to highlight that no income has been remitted to the UK.

Claiming Overseas Workday Relief

To claim Overseas Workday Relief, it is important that an individual can provide proof that they have worked outside the UK and hold the correct documentation to support their eligibility. This can include banking documentation, UK self-assessment tax forms and travel documents.

We advise that professional advice is sought before seeking to obtain eligibility. Our team of accountants are specialists who can help guide you on the most tax-efficient strategy for working in the UK and help ensure that you keep suitable records to benefit from OWR. So get in touch.

Conclusion

To conclude, the intricacies of non-domicile status and associated tax rules in the UK are complex. As individual circumstances vary, we encourage anyone looking to apply for or is currently using non-domicile tax reliefs, such as the remittance basis or Overseas Workday Relief, to contact us. We can offer the guidance you need to ensure full compliance and help you make a decision that will optimise your tax position.