Australian expats living and working in the UK that are considered “non-domiciled” have significant tax advantages compared to UK domiciled individuals.
A UK resident and domiciled individual will be subject to UK tax on both their UK and foreign income. In contrast, a UK resident but non-domiciled individual may elect to be taxed on their foreign income only to the extent that income is remitted into the UK.
How is a person’s domicile determined?
This is often a complex area of law. However, generally your domicile is determined according to the domicile of your father at your birth.
Everyone starts with a “domicile of origin”, and if your parents were married, this will be the domicile of your father.
A person may acquire a “domicile by choice” in another country if they decide to move permanently to a different country.
However, from April 2017, new rules are to be introduced that will result in an individual to be “deemed UK domicile” for all UK taxes if:
• They are UK resident and non-domiciled for more than 15 out of the past 20 tax years; or
• They were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).
Income tax and CGT
A UK resident non-dom currently has a significant tax advantage over a UK domiciled individual in that they may elect to use the remittance basis of taxation in respect of foreign income and gains such that foreign gains (e.g. a disposal of an Australian property) will only be subject to UK tax to the extent such income and gains are actually remitted (brought into) into the UK. However, the following points should be noted:
• The remittance basis will apply automatically for foreign income less than £2,000;
• If unremitted foreign income or gains exceed £2,000 and you elect to use the remittance basis, you will lose your entitlement to your UK tax-free personal allowance and CGT annual exempt amount;
• There is no charge on claiming the remittance basis in the first six years. Once you have become UK resident for 7 out of 9 years, you will be required to pay the Remittance Charge of £30,000 to use the remittance basis. The charge increases thereafter, and the cost may then outweigh the savings.
Whether it is beneficial to claim the remittance basis will depend on the amount of your foreign income and availability of foreign tax credits (noting the loss of the personal allowance and the Remittance Charge payable after year 7).
A “remittance” is interpreted widely by HMRC to include:
• Physical cash brought into the UK;
• Electronic bank transfers;
• The use of foreign credit cards in the UK;
• Purchase of assets in the UK; and
• Remittances of income by family members.
There is a complicated definition of “clean capital” which may be remitted tax-free into the UK. Extreme care should be taken when remitting capital from an overseas “mixed fund” bank account (containing clean capital and income) into the UK as this may trigger a taxable remittance. This area is highly complex and we recommend advice be obtained prior to remitting such funds.
We note that if you have interest bearing accounts in Australia or overseas, you may wish to consider closing these accounts down once in the UK, or having the interest paid into another non-UK account so that you can remit the underlying capital into the UK free of UK tax.
Currently, non-domiciled individuals are exempt from inheritance tax on non-UK assets.
However, a non-dom is considered “deemed domicile” for UK inheritance tax purposes if they are tax resident in the UK for 17 out of 20 years and therefore are potentially subject to UK inheritance tax on their worldwide estate.
Previously, it was relatively easy for non-doms to shelter UK assets from UK inheritance tax by holding them through an offshore structure, such as an offshore company, as only assets held directly are included. However, from April 2017, this position will change (refer below for more details).
New “deemed domicile” rules
There are three significant changes proposed from 6 April 2017 which will impact UK non-doms:
• Non-domiciled individuals will be considered “deemed domiciled” for income tax, CGT and inheritance tax purposes once they have been UK resident for 15 out of 20 years;
• Residential property situated in the UK will be subject to inheritance tax if held through an offshore structure such as a trust or company; and
• Any individual born in the UK will be treated as domiciled in the UK if they are UK resident, even if they have left the UK and acquired another domicile of choice.
There are various planning opportunities available for individuals that are to become deemed domicile from next April to mitigate the impact of these changes, however it is critical that action is taken now. Potential planning opportunities include:
• Inheritance tax and offshore trusts: Offshore trusts that are set up by an individual who is non-domiciled should remain outside the scope of UK inheritance tax even after that individual becomes deemed domiciled. Therefore, an individual who does not have a UK domicile of origin, but will become deemed domicile under the 15/20 year rule may consider transferring property to a trust prior to April.
• Rebasing for CGT: Offshore assets of individuals who become deemed domicile may be rebased so that only gains accruing after April 2017 will be subject to CGT.
• Cleansing relief: Individuals will have a one-year window to rearrange their mixed funds and separate them into clean capital, foreign gains and foreign income. This will allow clean capital to be remitted into the UK tax-free.
Further details on the proposed changes can be found here:
Visit www.csttax.co.uk for more information, or speak to your adviser today.
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication