Posted by Nick Day on 16 Sep 2014
Non-Doms UK Tax Update
Non-UK domiciliaries (or “non-doms”) that are tax resident in the UK are subject to special and complex UK tax laws, enabling them to file their UK tax returns on the “remittance basis”. Filing on this basis rather than the “arising basis” (reporting world-wide income and gains), could prove beneficial as non-UK sources of income/gain (including employment income in certain circumstances if the correct planning is undertaken – see further below) is liable to UK tax only to the extent that it is remitted or brought to the UK.
Your place of domicile is in broad terms your “homeland” i.e. where you have your long-term permanent home. It is the country (or federal state) with which you have the closest personal, family, social and economic ties, and the country in which you have realistic plans to settle permanently in the future, e.g. on retirement.
Your domicile of origin will have been acquired at birth and will normally be your father’s domicile at that time. It is difficult to change a domicile of origin but this is possible if you acquired a new domicile of dependency as a child or a domicile of choice in later life.
It is worth mentioning that for UK Inheritance Tax purposes only there are additional tests whereby you can be “deemed” to be domiciled in the UK, even if under the above criteria you are considered to be domiciled outside the UK.
Also, once a non-dom has been UK tax resident for seven out of the last nine (or twelve of the last fourteen) UK tax years they will be liable to pay the £30,000 (or £50,000) Remittance Basis Charge (RBC).
Taxation of Employment Income
The way the UK will tax your employment earnings will depend on:
- If you are resident and domiciled in the UK – all of your earnings are taxable in the UK. This is regardless of whether the employment duties are performed in the UK or abroad.
- If you are resident but not domiciled in the UK – if you claim the remittance basis on becoming a UK resident, in broad terms for the first three tax years of your stay in the UK, the earnings received for duties performed outside the UK are taxed only to the extent that they are paid in or remitted to the UK. Individuals need to ensure they set up a compliant bank account outside the UK to receive their earnings in order to avoid the complex “mixed fund” remittance rules.
- If you are a non resident of the UK – you are taxed only on earnings relating to UK duties.
Dual employment contracts often operated in previous years where a UK resident, non-domiciled employee worked both in the UK and outside the UK. The employee would have two employment contracts, one with a UK employer for performing UK duties, and a separate one with a non-UK employer for performing non-UK duties. The non-UK contract earnings would not be liable to UK tax if no UK duties were performed under this contract and the earnings were not remitted to the UK.
HMRC has revised the rules for dual contracts from 6 April 2014 to restrict their use if certain conditions are met. Income from the non-UK employment contract will now normally be taxed as UK income under the arising basis of taxation unless it has been substantively taxed in another jurisdiction or the employee cannot legally fulfil the contract without being formally employed in both territories, for example, because of regulatory requirements in the other country.
Commercial Loans Secured Against Foreign Income and Gains
HMRC has quite suddenly announced a change in practice for non-doms that have taken out commercial loans secured against their non-UK income and gains. Any new such loans were taken out from 4 August 2014 onwards will lead to the remittance of the collateral if the loan proceeds are brought to the UK.
The previous practice, which was deal with by HMRC “concession”, allowed loans for commercial purposes to be brought to the UK without remittance of the collateral where there was no intention that the security would be taken by the lender. Hence, the loan proceeds could be brought to the UK without causing a remittance of the collateral. If interest payments/loan repayments were paid out of foreign income or gains this caused a taxable UK remittance, but non-doms tended to use other funds meaning there was no tax charge.
HMRC advice is that individuals impacted need to by 5 April 2016 either repay the remitted parts of their loans using non-foreign income/gains or replace the security with non-foreign income/gains by this date. If the latter route is taken, HMRC states that it requires an undertaking in writing by 31 December 2015. If the security is not replaced by non-foreign income/gains or the loan is not repaid before 5 April 2016, a remittance of the collateral will be treated as made.
The problem is that in HMRC’s view a double tax charge will apply if the loan brought to the UK is secured against foreign income/gain and is then repaid using other foreign income/gains! It is important to anyone potentially affected by these changes to review their affairs to minimise the tax impact and see if restructuring or use of other reliefs may help.
The UK Tax Revenues from Non-Doms
The revenues that HMRC collected from non-doms for the 2011-12 year was a record at £6.8 billion, according to a recent report. So, contrary to certain expectations, non-doms more than pay their way. In an attempt to provide clarity and certainty, the present Government promised that no further changes would be made to the taxation of non-doms in the current five-year parliament after it previously altered the remittance basis rules. The above are examples of where it has not kept to this pledge.
We have wide experience of tax planning for those who are non-domiciled and if you would like to discuss how you might legally minimise your UK tax liabilities, please contact us for a consultation.
The following link takes you to our article on the “top ten expat tax tips for individuals moving to the UK” and gives outline details of some of the tax planning that is available:
Please click on the following link for further details of the services we offer to “Expats”:
Please click on the following link for a detailed summary of the UK tax residence/domicile rules:
Tax Services for Expats
If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org.
- Tax Relief For Residential Mortgages
- Overseas Pension Changes 6 April 2017
- Property Partnership Incorporation and SDLT
- Top 10 Expat Tax Tips for Individuals Moving to the UK
- Non-Resident Landlords – UK Tax Update