What is Non-Dom and How Does it Work?

The term ‘non-dom’ has been under the spotlight in recent news.  ‘Non-dom’ or ‘non-domiciled’ generally refers to residents of the UK whose permanent home is outside of the UK.

By default, UK residents are subject to UK tax on a worldwide basis – meaning that their UK and overseas income and gains are subject to UK tax.

Anyone claiming to be domiciled outside the UK who is a resident in the UK for tax purposes should seek expert advice on the matter. A very brief outline of the current tax regime for UK residents and non-domiciled individuals is set out below.

What is The Remittance Basis of Taxation?

Individuals who are UK residents but non-UK domiciled can elect to pay tax on the ‘remittance basis’ which refers to paying UK tax only on UK sources of income and gains and those remitted to the UK from foreign sources.

The rules concerning what constitutes a taxable remittance are complex. However, to summarise, any foreign income or gains are subject to tax in the UK if those funds are transferred or effectively enjoyed by the non-dom in the UK by any means. This also applies to the case of a close family member such as a spouse, child, or grandchild under 18 who has the effective employment of the funds following a gift outside the UK.  In addition, bringing money to the UK through a trust or company can also give rise to a UK tax liability.

Claiming for The Remittance Basis of Taxation

Once a non-dom has been a UK resident for 7 out of the previous 9 tax years, the remittance basis of taxation will only be available if they make a lump-sum payment of £30,000 for the year concerned.

This charge increases to £60,000 for those who have been a UK resident for 12 out of the past 14 tax years.

Once the individual has been a UK resident for 15 out of the past 20 tax years, the remittance basis will no longer be available and the individuals will be treated as ‘deemed’ UK domiciled for all tax purposes and their worldwide estate would also fall within the scope to UK Inheritance Tax.

A decision on whether or not to pay the remittance basis charge can be made on a year by year basis, but it should be appreciated that foreign income or gains of a year for which the remittance basis is claimed and not remitted to the UK will still be subject to UK tax in a subsequent year if it is remitted to the UK.

Any claim for the remittance basis for any tax year will mean that the usual income tax personal allowance and capital gains tax annual exemption will not be available.

However, those with modest amounts of foreign income or gains (under £2,000 per annum) are not required to pay the charge and they may continue to benefit from the remittance basis of taxation (and also preserve their entitlement to the personal allowance and annual exemption).