The United Kingdom has a system of tax incentives for high-net-worth individuals. While many may think that these tax benefits are only available in countries like Monaco or the Cayman Islands, the truth is that the non-domicile tax status in the United Kingdom offers similar benefits.
Regimes like this offer the best way to make your expansion efficient and boost the satisfaction of your employees abroad. However, the requirements can often be confusing, and they include a certain element of added risk if you aren’t familiar with local laws.
To give you the answers you need in order to benefit your global staff, we present the 6 most frequently asked questions about the Non-Domicile Tax Regime in the UK.
What is “Non-Domiciled” Tax Status?
The “non-domiciled” tax status in the United Kingdom, often referred to as “non-dom” status, is a unique tax classification that applies to individuals who are residents in the UK but do not have their permanent home or “domicile” in the country.
This tax status includes significant tax savings for income and inheritance, making it ideal for financial planning and preservation of wealth. When it comes to the non-domicile regime in the United Kingdom, it’s essential to understand what the tax status includes, who qualifies for the tax status, along with how to apply.
This situation will generally occur when a person’s living and working arrangements bring them to the UK regularly or for extended periods of time, yet their main areas of interest or background are based elsewhere.
Non-dom status recently gained a new level of infamy in 2022 when the wife of the now-Prime Minister of the UK was revealed to benefitting from the non-dom regime. As a result of not being domiciled in the UK, she is estimated to have saved up to £2.1m per year in taxable income. This caused a controversy, and the nom regime has since been subject to heightened public inspection.
This tax status offers several key advantages. These are:
Being Taxed on a Remittance Basis
Non-dom individuals can choose to be taxed on a “remittance basis.” Under this system, they are only required to pay UK tax on income and gains that are brought into or “remitted” to the UK.
This means that non-dom individuals’ foreign income and gains can remain untaxed in the UK if kept outside the country.
Significant Tax Savings
A non-dom remittance basis can provide substantial tax savings for individuals with significant foreign income and gains. The rates applicable to those with non-dom status are discussed below.
Preferable rates allow professionals to manage their finances in a way that minimizes their UK tax liability.
Inheritance Tax Benefits
Non-domiciled individuals also benefit from favorable treatment for UK Inheritance Tax (IHT) purposes. Only assets situated in the UK are subject to UK IHT, while non-UK assets are typically excluded.
This can result in significant IHT savings for those who will live and work in the UK long-term.
Who Qualifies for Non-Domicile Tax Status?
Non-dom status is effectively given automatically once someone exceeds £2,000 of foreign income and lives in the UK but has their permanent home abroad. Once they reach this point, individuals must prove their permanent home is outside the UK.
When applied for, proof will typically be based on several factors, such as the applicant’s place of birth and future retirement plans.
In general, this will first become a question if the individual intends to spend a large portion of their time in the UK but has enough foreign income. At this point, foreign income must be declared, and the individual can pay UK tax on this income alone (remittance) or pay taxes on worldwide income (arising).
What is Non-Domiciled Residency in the United Kingdom?
According to the UK tax authorities (HMRC), an individual is classified as a tax resident in the United Kingdom if:
- they spend more than 183 days of the year in the UK
- their sole residence in the UK for 91 days continuously, and they resided there for more than 30 days in a tax year
- they work full-time in the UK for any period within a year
However, a resident with non-dom tax status in the United Kingdom lives in the UK but considers another country their primary and permanent residence.
This kind of residency is favorable for high-net-worth individuals as it allows them to take advantage of tax benefits that other countries may offer without the need to fully move to that country.
The Cost of Non-Dom Status
Non-doms enjoy tax exemptions on foreign income. However, they will be subject to an alternative flat tax, which increases over time.
After residing in the UK for at least 7 of the last 9 tax years, they will pay an annual remittance basis charge of £30,000 in order to continue benefiting from the regime.
Those living in the UK for 12 of the last 14 years pay £60,000 yearly. Once this increases to 15 of the previous 20 years being spent in the UK, all worldwide earnings become taxable in the UK.
What is the Tax Rates for Non-Domiciled Residents in the United Kingdom?
The tax rate for non-domiciled residents in the United Kingdom depends on their choice of taxation basis.
Non-doms can opt for either the “arising basis” or the “remittance basis.” These are the following:
If they choose the arising basis, non-doms are subject to UK tax on their worldwide income and gains at the standard tax rates applicable to UK residents.
These rates can vary for different types of income, such as income tax rates for employment income or capital gains tax rates for gains on assets.
At the same time, non-doms can select the remittance basis, where they pay standard UK tax only on income and gains brought into the UK. The tax rate on such income and gains is consistent with the standard rates but is applied only to the portion that is remitted to the UK.
In this case, the applicant will have to pay the annual remittance basis charge once their residence in the UK exceeds the minimum threshold described above.
Being “Deemed Domicile,” or How This Regime May Change
Changes to the rules in recent years have introduced the concept of “deemed domicile” for individuals who have been UK residents for a certain period. This status can impact the application of tax rules, especially for Inheritance Tax.
Since 2017, for someone who uses the status of non-dom, deemed domiciled means someone who meets either of the following criteria:
– Condition A: Someone born in the UK, with a residence of origin in the UK, and resident in the UK since 2017. This may also be called a “domicile of origin” and can be related to where an individual’s parents live.
– Condition B: Someone resident in the UK for at least 15 of the 20 tax years immediately previous
Someone who is “deemed domiciled” immediately loses access to non-dom status and its benefits. However, non-dom status may be regained by residing consistently outside of the UK for a period of no less than 6 years.
How to Apply for Non-Domiciled Status in the United Kingdom?
Applying for non-domiciled status in the United Kingdom doesn’t involve a formal application process. Instead, it’s a matter of meeting certain criteria and making specific tax elections.
Here are the key steps:
Determine if you meet the criteria for non-dom status. To qualify, you typically need to have a domicile outside the UK, which is determined by factors like family history, intention, and connections. The exact requirements can be found on the official government website here.
UK Tax Residency
Ensure you are a UK tax resident, meaning you spend a significant amount of time in the UK.
Tax residency criteria can vary, so consult with tax professionals. In most cases, the easiest test is based on how many days of the year you spend in the UK.
Choose a Tax Basis
Decide whether you want to be taxed on the “arising basis” (paying tax on worldwide income and gains) or the “remittance basis” (paying tax only on income and gains brought into the UK). Non-doms often choose the remittance basis to minimize UK tax liability.
Comply with Reporting
Ensure you comply with UK tax reporting requirements, especially if you opt for the remittance basis. Report foreign income and gains accurately in your tax returns.
Do Non-Domiciled Residents Get Taxed Twice?
Non-domiciled residents in the United Kingdom can potentially face a situation where they are subject to taxation in the UK and also in their country of domicile. This is known as the risk of double taxation.
However, the UK has double taxation agreements (DTAs) with many countries to prevent double taxation. A full list is available here.
Under these DTAs, provisions are in place to ensure that taxpayers do not pay tax on the same income or gains in both the UK and their country of domicile. Tax credits, exemptions, or other mechanisms are used to eliminate or reduce the potential for double taxation.
Additionally, non-domiciled residents in the UK can often use the remittance basis to mitigate their UK tax liability by only paying tax on income and gains they bring into the UK, effectively reducing the risk of double taxation for their foreign income and gains.
Residency vs Non-Domiciled Residency in the United Kingdom
Residency in the United Kingdom is determined by an individual’s physical presence and the number of days spent in the country.
Non-domiciled residency, on the other hand, is a tax status based on an individual’s domicile, allowing them to potentially benefit from tax advantages by choosing the remittance basis of taxation for foreign income and gains while maintaining a domicile outside the UK.
How Non-Dom Status May Be Affected By Recent Developments
As something so important and tied to political trends, tax regimes change often and suddenly. Those caught unawares may face serious penalties if they do not keep track of any new developments that affect them.
In 2023, thanks to rising living costs and recent controversies, there have been consistent discussions regarding the future of non-dom status. It is believed that ending the non-dom regime could bring as much as £3.2 billion into the UK economy, according to the London School of Economics. This debate will more than likely continue into the coming year as the UK gets close to a national election.
Any change to the current tax regime will affect your operations or professionals in the UK if they are benefitting from non-dom status. Whatever the case, it’s best to keep a close watch on potential changes and seek professional expertise when you’re unsure.