'I’m a non-dom – what are the latest UK tax rules?'

Many of our readers are resident in the UK but domiciled elsewhere – which can be a tricky matter when it comes to tax.

It’s common knowledge that HM Revenue & Customs (HMRC) has made the once-attractive taxation rules applying to non-doms more difficult to use in recent years. 

If you’ve been a UK resident for tax purposes for at least seven out of the previous nine tax years, do you know that your domicile status affects your income tax as a UK-resident individual? Paula Fraser, Director of Private Client tax at Grant Thornton, and Anna McBride, Senior Tax Manager, review the income tax position for non-domiciled individuals (non-doms).

A short history of non-dom taxation

Prior to 6 April 2008, a non-dom could elect, free of charge, to be taxed on the remittance basis. The remittance basis enables them to protect all their non-UK income and gains from UK tax, provided they were not remitted to the UK. 

Between 6 April 2008 and 6 April 2012, individuals who had been resident in the UK for tax purposes for at least seven out of the previous nine tax years had to make an annual choice between paying a £30,000 remittance basis charge (RBC) to protect this position, or being taxed on the arising basis on their worldwide income and gains. 

Careful consideration is required in terms of dates of arrival and departure for the purposes of the seven-year test, as even one day of residence in a tax year would count as a ‘year’ for these purposes.

Non-UK domicile tax changes from April 2012

To add further complexities, the Finance Act 2010 has seen further restrictions on the reliefs for longer term UK resident non-doms. From 6 April 2012, any non-dom who has been resident in the UK for more than 12 years out of the 14 years prior to the claim must now pay an increased RBC of £50,000 each year to continue to be taxed on the remittance basis.

In addition, where a non-dom elects to be taxed on the remittance basis – through paying the £30,000 or £50,000 charge – they must also nominate at least £1 of offshore income or gains that has arisen in the relevant tax year. 

Remittance basis charge, nominated income and nominated accounts

In certain situations, an individual will be able to take credit for the remittance basis charge in another jurisdiction. In these situations, it may be sensible to nominate sufficient income and gains to generate a tax charge equal to the RBC to enable the credit to be taken.

The account into which the nominated income and gains are deposited is called the nominated account and it is essential that the account used for this purpose is chosen carefully in order to protect your wealth (see below).

Unsurprisingly though, HMRC has designed these rules so that it becomes impossible to take a credit for the remittance basis charge until and unless all other non-UK income and gains are remitted to the UK. As this is rather unlikely, the RBC is essentially an additional cost of electing to be taxed on the remittance basis. 

Potential pitfalls 

Furthermore, once an account is nominated, care must be taken never to remit to the UK from that account from that point on, for example, in that tax year or any subsequent tax years.

If such a remittance is made, very unfavourable re-ordering rules come into force which will tax all future remittances at the most punitive rates available. There has been a slight relaxation of this rule from April 2012, which allows a remittance of £10 of nominated income before the re-ordering rules are triggered.

To avoid such an issue with nominated accounts, it is advisable that a new, ‘clean’ account is opened offshore, which will be your nominated account. The account should earn at least £1 of income or gains in the relevant tax years – or more if credit is to be taken in another jurisdiction. 

This account can be used for non-UK expenses, although it is important that no transfers are made offshore from this account to an account from which you intend to remit to the UK. In essence, it should be isolated and used only for non-UK expenditure.

Special rules regarding payment of the RBC 

There are special rules which clearly state that the remittance basis charge may be paid from any source of funds (other than nominated income or gains), provided it is paid directly to HMRC from offshore without generating a taxable remittance. This includes funds that would otherwise be taxable and care should be taken to ensure that the RBC is not routed via a UK account.

However, if the RBC is later repaid by HMRC, it will be regarded as a remittance when the repayment is made and will be subject to UK tax at that point.

It is fair to say that the rules surrounding remittances generally, and the interaction between paying the RBC and your chosen nominated account, are complex. But if want to protect your wealth, you need to be clued up on the ins and outs.

This is an updated and edited version of an article that first appeared in the event brochure for The Scottish Asian Business Awards, which Grant Thornton sponsored. Writers Paula Fraser and Anna McBride are based in Glasgow. They specialise in advising businesses and individuals on tax but also work closely with our South Asia Group.