Despite the recent reforms to the taxation of UK resident non domiciliaries which took effect from 6 April 2017, there are still significant tax advantages for such individuals. So if you are a UK resident non dom, how much tax should you be paying in the UK?
UK non dom tax: Foreign worker 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.
In such circumstances, it is not necessary to file a return to HMRC.
UK non dom tax: Overseas workdays relief
A UK resident non domiciled individual may be entitled to claim Overseas Workday Relief if they are seconded to the UK.
The effect of a claim to Overseas Workday Relief (OWR) is that the part of the earnings from a UK employment which are performed wholly or partly overseas are treated as a foreign source of income, provided that the non domiciled individual has claimed the remittance basis and the income in question is not remitted to the UK.
It is usually advisable to open an offshore bank account to receive these earnings (“the nominated account”). The nominated account must be an overseas bank account in your own name and must have a balance of no more than £10 on the day that the first deposit of qualifying earnings from your employment is made into the account.
The relief is available to individuals in their first three years of tax residence in the UK but only if they have not been resident in the UK for tax purposes for three consecutive years prior to becoming UK resident.
UK non dom tax: Remittance basis
Foreign income and gains less than £2,000
UK resident non doms do not pay UK tax on their foreign income or gains if they are less than £2,000 in total in a tax year and they are not remitted to the UK. In such circumstances, there is no requirement to report the unremitted foreign income and gains on a tax return.
Foreign income and gains £2,000 or more
If a non dom’s foreign income or gains are more than £2,000, they must be reported on the individual’s tax return. The non dom then has the choice of whether to pay UK tax on the income or gains in the same way as a UK domiciled individual (i.e. the ‘arising basis’) 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, will have to pay an annual charge in order to use the remittance basis.
From 6 April 2017, only UK resident non doms who have been UK resident for 15 or fewer years in the preceding 20 years can claim the remittance basis. No remittance basis user charge is payable in the first seven years of UK residence. If you have been resident in the UK for more than 7 years out of the preceding 9, the remittance basis user charge is £30,000. A charge of £60,000 is payable if you have been if resident for 12 years out of the preceding 14 years.
Another new rule that takes effect from 6 April 2017 affects any individual who is not domiciled in the UK but was born in the UK with a UK domicile of origin and subsequently becomes resident in the UK. 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. This will mean that individuals who were born in the UK but have ceased to be UK domiciled – perhaps because their parents emigrated during their childhood – will be treated as deemed UK domiciled as soon as they become UK resident and will not be able to use the remittance basis.
What is a remittance?
A remittance takes place if you bring foreign income or gains into the UK, either directly or indirectly, in circumstances where you or a ‘relevant person’ can enjoy the benefit of them.
A remittance will also arise if you use foreign income and gains to:
- pay for a service in the UK
- purchase an asset in the UK
- purchase an asset overseas and then bring it to the UK
- repay a UK debt
- give money to someone else who then uses that money to buy goods and services in the UK for you or a relevant person
For this purpose, a relevant person includes a spouse, civil partner or cohabitee and any children or grandchildren aged under 18.
Users of the remittance basis need to take particular care with their banking arrangements in order to ensure that ‘clean’, i.e. freely remittable capital, can be segregated from foreign income and gains which would give rise to tax liabilities if remitted. The following accounts are recommended:
- Clean capital account
This should hold UK and foreign income and gains arising before you become UK resident. The only funds that can be added to this account after arrival are UK income, inheritances or gifts.
- Foreign interest account
All non-UK source interest arising on the clean capital account after arrival in the UK should be paid into this account.
- Foreign capital gains account
Proceeds from the disposal of any foreign investments or assets that have produced a capital gain after arrival in the UK should be paid into this account.
- Foreign capital loss account
The proceeds from the disposal of any foreign investments or assets that produce a capital loss after arrival should be paid into this account.
- Other foreign income account(s)
These should receive any other overseas income. There could be segregated accounts either by type of income received (e.g., dividends, interest, etc.) or by reference to amounts of foreign tax suffered or withheld.
UK non dom tax: Business Investment Relief
Business Investment Relief is available to UK resident non doms who claim the remittance basis. Business Investment Relief may be claimed in respect of foreign income and gains remitted to the UK provided that they are used to make a qualifying business investment within 45 days of the remittance.
The business into which the investment is made must be an unquoted trading, stakeholder or holding company which meets certain conditions. AIM listed companies are treated as unquoted for these purposes. The business must be carried on commercially and with a view to profit.
The investment may be a subscription for new ordinary or preference shares or a loan to the qualifying business. Since 6 April 2017, the acquisition of existing shares in the business can also be a qualifying investment.
The investee business must carry on a business which is treated as a trade for corporation tax purposes, which includes a business whose income derives from land or property or one carrying out research and development activities intended to lead to trading activity.
Business Investment Relief is not available if the investor or persons connected with the investor, receive, expect to receive or are entitled to receive a benefit from the target company, directly or indirectly, unless such benefit is received in the ordinary course of business (e.g. as salary, ordinary dividends or loan interest). From 6 April 2017 onwards, business investment relief will only be restricted if benefits received are directly or indirectly related to the investment.
Enterprise Tax can advise on UK non dom tax status
As experienced tax consultants, ETC can provide tax compliance, management and planning advice across all areas of UK non dom tax, including liability, reliefs, exemptions and wider planning issues in the context of your international tax status.
Our services include:
For advice, contact one of our chartered tax specialists.