Becoming a UK non-dom or non-resident: What you need to know

In this article we review both domicile and residency status and the tax consequences, considerations and benefits.

What is the difference between domicile and residency?

The terms ‘Domicile’ and ‘Residence’ are often mistaken as the same. However, the two have different legal definitions under UK law which can have serious tax consequences which we explain below.

Domicile is your ‘long term or permanent home’ and there are 3 types of domicile.

• Domicile of origin – you acquire a domicile of origin at birth. This is usually the same as the domicile of your father (unless your parents are not married then you take the domicile of your mother).
• Domicile of dependence – before the age of 16, if your father (or mother) changes domicile, your domicile will follow suit.
• Domicile of choice – after 16, you are able to change your domicile of origin and choose a new domicile.

The benefit of being non-UK domiciled is that the remittance basis is available to you. See more on the remittance basis below.

Residence is based on your physical presence’ Generally, you are a resident of ajurisdiction for tax purposes if you are physically present there for at least 183 days per tax year. Your residence can give you the legal right to live, work, set up a business, travel, or study in the country.

To determine your UK residence position, you will have to apply the Statutory Residence Test (SRT) which consists of 3 tests (Automatic overseas Test, Automatic UK Test and Sufficient Ties Test). Within each test, there are a number of specific conditions..

Although the SRT generally determines a person’s residence for a whole tax year, in certain circumstances a year may be split into periods of residence and non-residence. Advice on the appropriate split year tax treatment should be sought in such cases.

The benefit of being a non-UK resident for tax purposes is that you will not pay tax on your income arising outside the UK and will not pay UK capital gains tax (CGT) on the sale or disposal of assets anywhere in the world (apart from UK land and property).

It is possible to be UK-domiciled but non UK resident, or vice versa and your particular mix of residency and domicile status can impact the UK tax you have to pay.

What is non-dom status?

As the name suggests a UK resident non-dom is someone who is resident in the UK but does not intend to live here permanently and so, is not considered to be domiciled here. There are a number of factors that can be taken into account, as it is a very subjective test.

This status has important consequences for tax purposes. Ordinarily when someone is resident in the UK they will need to pay tax on their worldwide income and any capital gains that they have.

However, if someone happens to be a UK resident non-dom then, subject to meeting certain criteria, they have the option of electing to be taxed using the ‘remittance basis’.

What are the benefits of being a UK non-dom?

The UK has a beneficial taxation regime for those who become UK resident but remain non-UK domiciled. This regime has been tightened in recent years and now only applies to those non-doms who weren’t born in the UK and have never had a UK domicile of origin (known as Formerly Domiciled Residents (FDRs)).

For all UK non-doms, overseas income/gains are taxable on the arising basis just as they are for any UK domiciled individual. However, UK non-doms (not FDRs) also have the option of making a claim for the remittance basis to apply.

Broadly speaking, as a UK non-dom, claiming the remittance basis means you only pay UK tax on UK income and gains, and on foreign income and gains that are ‘remitted’ i.e., enjoyed or brought into the UK.

There are some considerations before choosing to apply the remittance basis:

• By claiming on the remittance basis, you lose your personal allowance for income tax and the annual exempt amount for capital gains tax (there are some double taxation agreements that override this, however the number of countries concerned is very limited).
• If you are a UK non-dom, the remittance basis applies automatically to those who have unremitted foreign income or gains of less than £2,000 in a tax year.
• If you are a UK non-dom and have been resident in the UK for at least seven out of the previous nine tax years you will have to pay a £30,000 annual charge (the remittance basis charge) if you claim the remittance basis. This increases to £60,000 after 12 years of residence.

There is no doubt that the remittance basis can be advantageous for those with overseas income such as expats coming to work in the UK for a brief period of time and in the longer-term for non-doms with significant overseas earnings. But they must weigh up the fact that they will not be able to make use of those overseas earnings in the UK for the duration that the remittance basis is claimed, and they may incur tax costs from a loss of personal allowance or the remittance basis charge if applicable.

Under current legislation it is entirely legal and standard planning for a UK non-dom to claim the remittance basis to structure their affairs in a tax efficient manner, which allows access to previously accumulated overseas funds (known as clean capital).

However, as seen in recent media coverage, the potential associated reputational risk (if relevant to your situation) should be factored into your decision.

How do you change your domicile status?

Changing your domicile is not straightforward and relies on several factors.

These include demonstrating that you have settled permanently in the country that you now consider yourself domiciled and you must cut ties with your country of domiciled origin. Factors such as where you intend to retire, your Will, your permanent place of residence, and your business, social and family commitments will be taken into consideration.

There is no formal process for agreeing your domicile status with HMRC, as it is generally an issue that is considered retrospectively. If you consider yourself to be a non-dom, it is important that you complete the relevant sections in the residence pages of your self-assessment tax return. Getting this wrong can lead to tax investigations and penalty fines. It is therefore important to get this correct and advisable to seek the help of a professional tax advisor.

Becoming a UK non-resident and the tax benefits

There are many reasons why individuals may choose to leave the UK, for instance a lifestyle change, employment or other personal circumstances.

Those who are not resident in the UK for tax purposes do not pay tax on income arising outside the UK and do not pay UK capital gains tax (CGT) on the sale or disposal of assets anywhere in the world (apart from UK land and property). This compares to a UK resident, where any foreign income and gains you have may also be taxed in the UK.

It is worth noting that expat workers coming to the UK are subject to UK tax on their UK earnings, whether or not they are resident in the UK.

It is therefore important to know if you are a tax resident or not and this applies even if your income has already been taxed in another country (as you may be able to get some double taxation relief if this is the case).