Rules relating to UK resident non-domiciled individuals
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 so elect are taxed on their worldwide income and gains on an arising basis. For those wishing to claim the remittance basis:
- The annual charge is £50,000 for non-domiciled individuals who have been UK resident for at least twelve of the previous 14 tax years and who wish to retain access to the remittance basis of taxation. A £30,000 charge applies to those who have been resident for at least seven of the preceding nine tax years but less than twelve of the previous 14 tax years.
- The tax charge will be removed when non-domiciled individuals remit foreign income or capital gain to qualifying UK for the purpose of commercial investment in the UK businesses.
The rules relating to residence and domicile affect some quite complex areas of tax principle, which have a potentially significant impact on a wide range of individuals and their tax liabilities.
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. All income arising in the UK is taxable here, whether the recipient is resident here or not, so a foreign national who spends no time in the UK but has rental property here will be taxed in the UK on the profits arising here. When an individual is UK resident for tax purposes, they are also taxable on income arising anywhere else in the world, and this holds true for all UK residents. However, the basis on which some are taxed differs - this affects the amount of income chargeable to tax in any tax year.
Previously, those who were not domiciled (or not ordinarily resident) in the UK were only taxed on their foreign income (and capital gains) to the extent that the income or gains remitted (or brought to) the UK. This is known as the remittance basis, and for very wealthy non domiciled individuals would include all of their business and investment income earned abroad. They would previously only be liable to UK tax on the income and gains if the proceeds were actually brought here, which most of them avoided doing. Many other individuals were not domiciled here, as normally an individual takes their domicile at birth, which follows the domicile of their father, so the new rules affect quite a large number of people, many of them not at all wealthy.
The rules require individuals to claim the remittance basis in future, and for long term residents where the unremitted income or gains exceeds £2,000 the remittance basis will only be available on payment of £50,000 (£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 £50,000 tariff to avoid it. In addition, those who claim a remittance basis will also lose their UK personal allowances and CGT exemption. 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 exempt amount. 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 (see above), a tax charge of either £50,000 or £30,000 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. The remittance basis charge counts as UK income tax paid for the purpose of Gift Aid.
Statutory residence test
A new statutory residence test came into effect on 6 April 2013. This comprises three elements:
- Is the individual automatically resident?
- Is the individual automatically overseas?
- 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.