Historically the United Kingdom and the Republic of Ireland are unique in Europe in making a distinction between a person’s domicile and residence for tax purposes. However, since Alistair Darling’s 2008 UK Budget the tax treatment of non-domiciled but resident individuals, whilst still potentially very beneficial, has changed significantly especially for those who have been ordinarily resident in the UK for 7 out of the previous 9 years. The current position is that the ‘traditional’ status quo still exists for those non-domiciled but UK resident individuals that have been in the UK for less than 7 out of the preceding 9 years. This means that a person deemed non-domiciled by Her Majesty’s Revenue & Customs (HMRC), is only subject to pay UK income and capital gains taxes on those sums physically remitted back to the UK and not on his/her worldwide income/capital gains as would otherwise have been deemed the case if they were UK domiciled. Further, if a distinction is made between a non-domiciled individual’s capital and income before becoming tax resident in the UK it is often possible to totally avoid exposure to UK taxes provided the individual only uses their pre-migration capital to live off and not any interest that may be accumulated post UK fiscal migration. Most importantly, despite these significant advantages all UK fiscal migrants, even those intending to stay in the UK for less than 7 years, will benefit from the UK’s extensive double taxation treaty network which can provide a higher degree of protection against 3rd provisions than would be the case if they chose to reside in a traditional tax haven such as Monaco or the Bahamas.
In the case of those who are non-UK domiciled but UK tax resident and have resided in the UK for more than 7 out of the last 9 years there are three possible results depending on the action or inaction taken, namely:
- Where a non-domiciled but UK tax resident individual does nothing he or she will become taxed on their worldwide income and capital gains in a very similar manner to UK domiciled and resident individuals. Of course, just as for UK domiciled and resident individuals they will be able to use domestic tax planning tools to mitigate their tax exposure but not to a level that otherwise might have been possible;
- Where a non-domiciled but resident individual elects to pay the annual £30-£50k duty, they can continue to benefit from the exemption on non-domiciled individuals having to pay income and capital gains tax on their worldwide assets. However, it should be noted that under Taxation of Chargeable Gains Act (TCGA), 1992, have been extended so that non- domiciled individuals, even when paying the duty, will now become subject to UK tax on all UK investments even when such investments have been made using an offshore company;
- Where a domiciled or non-domiciled UK tax resident establishes a private interest foundation (PIF) this can both avoid the need to pay the annual £30-50k duty and also maintain the ability to invest in the UK using tax efficient companies without falling foul of the TCGA extended provisions.
In précis, whilst the 2008 and subsequent Budgets have considerably restricted the historic benefits available to the non-domiciled but UK resident community there are nonetheless still significant advantages for wealthy foreign expatriates to move to the UK. For more information on these benefits please contact one of our tax planning consultants.