What is a non-dom and how does it affect your tax position?
A non-dom is short for a non UK domiciled individual. An individual’s domicile is usually the country in which his permanent home is established. Under UK law, a domicile of origin is acquired at birth and this is normally the father’s domicile. This can be the mother’s domicile where the parents are not married.
There can beare considerable tax savings to be enjoyed by a non-domiciled individual. These savings can be in respect of Income Tax, Capital Gains Tax and, most significantly, Inheritance Tax.
For UK residents, Income Tax is charged, broadly, on worldwide income. Individuals normally therefore are liable to UK Income Tax on the full amount of any foreign income arising abroad, whether it is brought into the UK or not (the arising basis). Someone who is resident in the UK but is either not domiciled here, or not ordinarily resident here, may choose to be taxed either on the arising basis or on the remittance basis. The remittance basis allows foreign income to only be taxed when it is brought into the UK. In most circumstances, the remittance basis must be claimed and is not an automatic default position. However, taxpayers should be aware that the Finance Act 2008 introduced an annual tax charge of £30,000, known as the ‘Remittance Basis Charge’ for claiming the remittance basis, if you have at least £2,000 of unremitted foreign income and gains, you are 18 or over and you have been UK resident in the last seven out of the previous nine tax years. It is worth noting that it is proposed that there will be a higher rate of £50,000, for those who have been in the UK for 12 or more out of the previous 14 tax years, from April 2012..
‘Non-dom’ status also helps the Capital Gains Tax position for individuals who are either resident or ordinarily resident in the UK for tax purposes as their chargeable gains may be taxed either on the arising basis or on the remittance basis. For Capital Gains Tax the remittance basis taxes UK gains as they arise but taxes foreign gains only as they are brought into the UK.
Usually, Inheritance Tax applies to your worldwide property if you are domiciled in the UK. However, if you are domiciled elsewhere you are only liable to UK Inheritance Tax on your UK assets. This means that any foreign assets are not subject to UK Inheritance Tax when you die. Taxpayers should also be aware of the pitfall of the ‘deemed domicile’ rules. Broadly, for Inheritance Tax purposes, you will be deemed to be UK domicile if you have been resident here for 17 out of the last 20 years and so all of your assets, including your foreign assets, will be subject to UK Inheritance Tax.