Taxation for Non-Doms in the UK: what you need to know

Insight

11.04.2022

There’s been much discussion about the non-dom tax status of the chancellor’s wife in recent days, not all of it well-informed. So, what is a non-dom?

Defining a Non-Dom

A domicile is your home for certain legal purposes, such as marriage and succession but also for certain tax purposes. Under English law everyone has a domicile, so, strictly, there is no such thing as a non-dom but the term is commonly used to refer to someone who has a foreign domicile for tax purposes. Under English law you acquire a domicile of origin at birth from your father (or mother if your parents were unmarried) and it tends to stay with you. If you move to a country different from the country of your domicile, say from India to England, your Indian domicile of origin will remain with you unless you decide (while in England) to make England your permanent or indefinite home. If you intend to remain in England for a period (for example 10 years) or a purpose (for example work), intending to leave at some point in the future, in principle, you retain your Indian domicile.

Does your passport affect your Non-Dom position?

It is incorrect to suggest that your citizenship determines your domicile or that if you are a citizen of one country you cannot be domiciled in another.

Understanding the tax position for Non-Doms residing in the UK

If you are resident in the UK for tax purposes and have a foreign domicile, it entitles you to use the remittance basis of taxation, which, though the term hasn’t been used, is what makes being a non-dom topical. The remittance basis enables you to shelter your foreign income and gains (frequently abbreviated to FIG) from UK income tax and CGT. The charge to tax on FIG arises to the extent FIG is remitted (ie, brought) to the UK, either directly or indirectly. FIG that is spent abroad, for example, to maintain the Californian home, is not subject to UK tax. It may be taxed elsewhere, but not in the UK.

The remittance basis doesn’t automatically apply. You have to apply for it in your tax return each year: it is a matter of choice, and you can opt in and opt out from one tax year to the next.

As a UK resident non-dom, you are entitled to use the remittance basis for up to 15 tax years in any given 20. You then become deemed domiciled for all tax purposes, unless you cease being UK resident. For the first seven out of nine tax years of being UK resident, you can use the remittance basis “for free”. For the 8th to 12th tax years (out of 14), you need to pay the remittance basis charge of £30,000 for each year you choose to use the remittance basis (which seems to be the position of the chancellor’s wife). For the 13th to 15th tax years, the charge rises to £60,000 per year of use. These intricacies tend not to be reported by the UK press.

What are the implications for Inheritance Tax (IHT)

And then there’s IHT. If you are a non-dom (whether you choose to use the remittance basis or not), your non-UK wealth is outside the scope of IHT but it comes within the scope of IHT once you become deemed domiciled in the UK. To overcome this risk, you could place your non-UK assets in trust before you become deemed domiciled as that ring-fences them from IHT indefinitely. There has been a great deal of commentary on offshore trusts lately too and generally speaking it is these so called “Excluded Property” trusts to which this commentary refers. A whole other topic for another day!

Given the recent high octane coverage of non-dom tax status, it will be genuinely interesting to see whether political pressure leads to changes in the UK tax system – buy now while stocks last?

If you require further information about anything covered in this briefing, please contact Nick Dunnell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.