Non dom tax status: What is a ‘non-dom’?
Domicile can be an important factor in determining an individual’s tax position. Those having a domicile for tax purposes outside the UK are frequently referred to as ‘non-doms’.
Non-dom tax status may confer a number of tax advantages, although the UK Government’s recent legislative changes have sought to reduce, and in some respects, eliminate these.
Non dom tax status: What is ‘domicile’?
Domicile is not specifically a tax-related concept, but one that applies for the purposes of private law generally and that has tax consequences.
Each of us is born with a domicile (our ‘domicile of origin’, see below). We will always be domiciled somewhere throughout our lives and it is not possible to have more than one domicile at any given time – although one’s domicile may change on several occasions during a person’s lifetime.
The rules on domicile sometimes give surprising results.
It is common for domicile to be confused with nationality, citizenship and residence, but these are quite separate and distinct concepts.
There are three types of domicile: domicile of origin, domicile of dependency and domicile of choice.
Non dom tax status: Domicile of origin
If your parents were married at the time of your birth, your domicile of origin will be your father’s domicile at that time.
If your parents were not married at the time of your birth, your domicile of origin will be your mother’s domicile at that time.
If you were adopted, your domicile will be that of your adoptive father, unless there was no adoptive father, in which case it will be that of your adoptive mother.
It may be necessary to investigate the circumstances surrounding the relevant parent’s domicile in order to determine your own domicile of origin.
Non dom tax status: Domicile of dependency
While an individual is under the age of 16, his or her domicile will follow that of the relevant parent. So, if that parent’s domicile changes before the individual reaches the age of 16, the individual’s domicile will change with the parent’s domicile. This is known as ‘domicile of dependency’.
Women who married before 1 January 1974 will have acquired their husband’s domicile at the date of marriage as a domicile of dependency.
Non dom tax status: Domicile of choice
After the age of 16, an individual has the capacity to acquire a new domicile – known as a ‘domicile of choice’.
In order for an individual to acquire a new domicile of choice, it would first be necessary to show that he or she had settled permanently in another jurisdiction.
The individual would not necessarily need to sever all ties with the jurisdiction in which he or she was previously domiciled and the fact that an individual continues to hold a passport or retain citizenship of their previous domicile may not prevent the acquisition of a new domicile of choice.
Equally, it is not necessary to acquire a passport or apply for citizenship in the new jurisdiction, but these factors will be taken into account in determining whether a new domicile of choice has been acquired.
The onus of proof of the acquisition of a new domicile of choice is on the person alleging the change. Thus, for individuals who do not have a UK domicile of origin or dependency, should HMRC wish to allege that such an individual had acquired a domicile of choice in the UK, the burden of proof would fall on HMRC.
On the other hand, if an individual with a UK domicile of choice or dependency wished to show that they had acquired a domicile of choice, the burden of proof would fall on that individual.
The courts have taken the view over the years that domicile is a ‘sticky’ concept and it is often difficult to persuade them or HMRC that a change has occurred unless strong evidence is presented that the individual concerned has settled permanently in the new jurisdiction.
However, this also means that it is also unlikely that non-UK domiciled individuals will be challenged on the basis that they have acquired a UK domicile of choice even if they are long-term UK residents with substantial UK interests.
Non dom tax status: Deemed domicile
Until 5 April 2017, and for the purposes of Inheritance Tax (IHT) only, individuals were treated as (‘deemed’) domiciled in the UK if they had been resident in the UK for 17 out of the preceding 20 tax years.
However, new rules have been introduced in draft legislation which will take effect from 6 April 2017. These rules will apply if one of two conditions is met:
- The first of the new rules (referred to in the draft legislation as ‘Condition A’) affects long-term UK resident non doms. The period of UK residence which will lead to a deemed UK domicile for all tax purposes – including IHT – will be reduced from 17 to 15 out of the 20 preceding tax years.
- The second new rule (‘Condition B’) affects non doms who were born in the UK and had a UK domicile of origin at that time but have subsequently acquired a foreign domicile. Such a person will now be treated as deemed UK domiciled for all tax purposes for any year in which he or she is UK resident. There will be individuals who fall within Condition B who were born in the UK but have ceased to be UK domiciled – perhaps because their parents emigrated during their childhood – and who will be treated as deemed UK domiciled for tax purposes from the moment they arrive in the UK, even if they have had no previous material connection with the UK.
Non dom tax status: What are the potential advantages?
Non doms who are not deemed domiciled in the UK as described above may enjoy a number of tax advantages over those who are UK domiciled.
A non dom individual does not pay tax in the UK on foreign income or gains if they total less than £2,000 in the tax year and are not brought into the UK. Neither is there a requirement to report this income on a tax return.
If the non dom’s foreign income is more than £2,000 in the tax year, the income must be reported on his or her tax return.
The non dom then has the choice of whether to pay UK tax on the income or gains, or to claim the remittance basis if this is beneficial.
The effect of a claim to remittance basis is that only income and gains brought into the UK (‘remitted’) are taxed in the UK.
However, this is subject to a number of conditions. An individual will lose personal allowances and exemptions and, if he or she has been resident in the UK for a certain number of tax years, they will have to pay an annual charge in order to use the remittance basis.
Foreign Worker’s Exemption
An exemption may be available if you are not UK domiciled and you work both in the UK and abroad. An individual will qualify for the exemption if:
- income from working overseas is less than £10,000
- other foreign income is less than £100
- all overseas income has been subject to tax where it was earned (even if no tax was in fact paid due to allowances and exemptions)
- the combined UK and foreign income is no more than the basic rate of income tax
Overseas Workday Relief
A non domiciled individual may be entitled to claim Overseas Workday Relief if he or she is seconded to the UK.
The effect of Overseas Workday Relief (OWR) is to treat part of the earnings from a UK employment which are performed wholly or partly overseas as if it were a foreign source of income, provided that the non domiciled individual has claimed the remittance basis and the said income is not remitted to the UK.
The relief is available to individuals in their first three years of tax residence in the UK following three consecutive years of non-UK tax residence.
In general, assets situated outside the UK that are owned by a non UK domiciled individual are ‘excluded property’ for IHT purposes. Excluded property is not subject to the IHT charge on death or on lifetime transfers.
The excluded property regime extends to foreign assets held in trust if the settlor was not UK domiciled at the time that he made the settlement, even if he or she subsequently acquires a UK domicile or deemed domicile.
Other categories of assets which are excluded property in the hands of a non domiciled individual are:
- holdings in authorised unit trusts or open-ended investment companies
- exempt British government securities if the beneficial owner is also not UK resident
- foreign currency bank accounts maintained in the UK by individuals who are also not UK resident
- works of art which are situated in the UK for one or more of the purposes of public display, cleaning and restoration (and for no other purpose)
ETC can advise on non dom tax status
As experienced tax consultants, ETC can provide tax compliance, management and planning advice across all areas of non dom tax status and liability.
Our services include:
For advice, contact one of our chartered tax specialists.