Individuals who are not domiciled in the UK can benefit from tax advantages that are not available to UK-domiciled individuals. One of the key advantages is being able to avoid tax on non-UK source income and gains, through use of the remittance basis of taxation. This can potentially also include the taxation of your employment income, if you perform some of your work abroad (refer to ‘Overseas Workday Relief’).
It is worthwhile to note that individuals domiciled outside the UK are taxed in the same way as UK domiciled individuals on UK source income.
Individuals who are UK resident and have a UK domicile are subject to tax on the arising basis. This means that their worldwide income and gains are subject to tax as it arises. On the other hand, individuals who are UK resident but domiciled outside the UK may use the remittance basis of taxation.
The remittance basis means that tax is payable only when foreign income and gains are remitted to the UK, rather than when it arises. Therefore, non-domiciled individuals who keep their foreign income and gains outside the UK will not be taxed on those amounts.
Individuals domiciled outside the UK have the choice each tax year as to whether or not to make use of the remittance basis, or to use the arising basis.
Individuals who claim the remittance basis of taxation should make themselves aware of what might constitute a taxable remittance. This is because some individuals claiming the remittance basis are prone to accidentally make taxable remittance. See Remittances to the UK for an explanation of what may constitute a taxable remittance of foreign income or gains.
Those with foreign income and gains that have not been remitted to the UK should determine whether the total figure is above or below £2,000 in the tax year.
- If less than £2,000 of unremitted foreign income and gains in a tax year: the individual can use the remittance basis automatically, without making a claim for the remittance basis.
- If more than £2,000 of unremitted foreign income and gains in a tax year: the individual can use the remittance basis but must make a claim for the remittance basis.
We discuss these points in the next two sections.
Where the remittance basis applies automatically: the £2,000 exception
If a non-domiciled individual has unremitted foreign income and gains in a tax year of less than £2,000, then the remittance basis automatically applies.
Such individuals are still entitled to the UK income tax personal allowance and capital gains annual exemption in full.
No matter how long an individual is resident in the UK, as long as they are non-domiciled and their unremitted foreign income and gains are less than £2,000, the remittance basis will apply automatically. This is the case even where an individual becomes ‘deemed domiciled’ for tax purposes.
Margaret is domiciled outside the UK. She has lived in the UK for 20 years. In 2020/21 she received £1,500 of investment income from Germany, which she did not bring to the UK. Even though she is deemed domiciled in the UK under the 15 out of 20 year rule, she can still use the remittance basis and not be subject to tax on her Germany investment income.
Where a claim must be made for the remittance basis to apply
A claim for the remittance basis to apply is required where an individual’s unremitted foreign income or gains is £2,000 or more.
This can only be done if the individual is not domiciled in the UK and not ‘deemed domiciled’ in the UK (an individual is ‘deemed domiciled’ in the UK if they have been UK resident for 15 of the previous 20 years).
Many individuals who can do so will make this claim (on their tax return), as the alternative would be taxation of their foreign income and gains in the tax year on the arising basis.
However, some tax returns are prepared without making a claim for the remittance basis, and instead taxing the income and gains on an arising basis. This might be done for two reasons.
Firstly, making a claim for the remittance basis will result in losing the tax-free personal allowance, and capital gains annual exemption. It should be noted, though, that to some individuals this might be irrelevant, since individuals with incomes of over £100,000 will be subject to a phase-out of the personal allowance, whether or not a remittance basis claim is made.
Secondly, some individuals may want to bring their foreign income or gains to the UK, which means that it is likely easier for them to be taxed on the arising basis (i.e. on their worldwide income and gains) and thereby have flexibility income or gains to the UK.
Remittance Basis Charge
Non-domiciled individuals are eligible to make a claim for the remittance basis in each of the first seven tax years they are UK resident, without paying a charge. For individuals who have been in the UK longer than that, the following charges apply:
- Where the individual has been UK resident for at least 7 out of the previous 9 tax years immediately before the relevant tax year, there will be a Remittance Basis Charge of £30,000.
- Where the individual has been UK resident for at least 12 out of the previous 14 tax years immediately before the relevant tax year, there will be a Remittance Basis Charge of £60,000.
- After 15 years of being UK resident, an individual is longer able to claim the remittance basis. This is because individuals who have been resident in the UK for at least 15 of 20 tax years that immediately become deemed domiciled in the UK.
An individual can decide each year whether or not they wish to claim the remittance basis when they complete their tax return. Claiming the remittance basis for one tax year does not mean that they must do so for the next tax year.
Joanna came to live in the UK in 2013/14. Her unremitted foreign income and gains is approximately £5,000 each tax year. As it is not below £2,000, she must make a claim on her tax return, if she would prefer to be taxed on the remittance basis.
2013/14 – year 1
2014/15 – year 2
2015/16 – year 3
2016/17 – year 4
2017/18 – year 5
2018/19 – year 6
2019/20 – year 7
2020/21 – year 8. At this point Joanna has been in the UK for at least 7 of the previous 9 tax years immediately before it. Therefore if she would like to claim the remittance basis of taxation, she would have to pay the £30,000 Remittance Basis Charge. As her foreign income and gains are £5,000 it would not be worthwhile for her to pay the charge. Therefore Joanna’s tax return is prepared on the ‘arising basis’ for 2020/21, which means that her foreign income and gains are taxed in the UK.
Meaning of ‘Foreign Income’
Common examples of sources of foreign income:
- Rental income from an overseas property
- Investment income such as dividends from overseas companies, and interest on overseas accounts
- Pension income from overseas
- Reveune from a business that operates overseas
Employment income can also be foreign income in certain circumstances. Where an employment involves work performed both inside and outside the UK, all of the employment income is liable to tax in the UK on the arising basis, unless Overseas Workday Relief applies. If Overseas Workday Relief can’t be used, then the only instance where employment income can be taxed on the remittance basis is if all employment duties are performed outside the UK for a non-UK employer.
An example where this might occur could be as follows: an individual domiciled outside the UK leaves temporarily to take up a short term contract overseas. All their work for the contract is performed overseas. Once they have finished the work they return to the UK. They leave all their earnings from the employment outside the UK. In this case the individual can claim the remittance basis and not be subject to UK tax on the overseas earnings, because all duties were performed outside the UK. Such a situation is relatively uncommon.
Much more common is the use of Overseas Workday Relief.
Meaning of ‘Foreign Gains’
A foreign gain may occur when an overseas asset is sold or given away. This includes such items as shares in companies as well as residential and non-residential property.
Capital Gains Tax: Deemed Domiciled
The new ‘deemed domicile’ rule came into effect in the 2017/18 tax year. Many non-UK domiciled individuals became deemed domiciled in the UK on 6 April 2017 as a result of meeting the 15 out of 20 year rule. These would be individuals who had been UK resident for at least 15 out of the previous 20 tax years.
As a way to ease the tax burden this might cause, the government introduced ‘rebasing’ for Capital Gains Tax. Normally when calculating the taxable gain on the sale of an asset (such as shares or a property), the cost is deducted from the sale proceeds. The new legislation automatically applied rebasing to the market value of the asset on 5 April 2017. This applied to all overseas assets that an individual owned.
The following points should be noted:
- Rebasing only applies for those individuals who became deemed domiciled in the UK on 6 April 2017. It does not apply to individuals that become deemed domiciled in later years.
- Only the value of non-UK assets are subject to rebasing.
- It would be advisable for affected individuals to make a list now (if they haven’t already done so) of the value of their overseas assets at 5 April 2017. When they dispose of an asset and file a return they will calculate the gain on the basis of that value, unless they make an election to disapply the rebasing for that particular disposal.
- It is possible to disapply rebasing to particular assets. Someone would want to do this if the original cost of the asset was higher than its value on 5 April 2017.
Inheritance tax may arise on an individual’s death, depending on the value of what they owned when they died, as well as on the value of assets gifted within seven years of their death. If tax is due, payment is normally arranged by the executor of the estate. The standard tax rate is 40%.
Individuals domiciled in the UK are chargeable to inheritance tax on their worldwide assets. Non-domiciled individuals, are only within the charge to inheritance tax on assets in the UK.
All individuals (both UK domiciled and non-UK domiciled) are entitled to a £325,000 nil rate band, meaning that only the value of assets in excess of this amount are subject to inheritance tax.
Married Couples and Inheritance Tax
For individuals that are married, assets that are passed to an individual’s spouse are not subject to inheritance tax. However, if the deceased was UK domiciled, and the spouse is non-UK domiciled, relief only extends up to £325,000. As this could result in a serious tax disadvantage (i.e. in situations where the UK domiciled individual dies first), it is possible for the non-UK domiciled individual to make an election to be treated the same way as a UK domiciled individual for inheritance tax purposes.
Under the deemed domicile rules, if a non-UK domiciled individual has been resident in the UK for least 15 out of the previous 20 tax years immediately before the relevant tax year, they will be deemed domiciled in the UK for tax purposes. As a deemed domiciled individual, their worldwide assets will be within the charge to inheritance tax in the UK.
One planning strategy that can be used by non-UK domiciled individuals, prior to becoming deemed domiciled under the 15/20 year rules, is to settle non-UK assets into an offshore trust. Such ‘excluded property’ trusts will be outside the charge to inheritance tax and this status continues even once the settlor comes to be deemed domiciled in the UK.