Non-UK domiciled individuals who become residents in the UK can benefit from a favourable tax regime known as the remittance basis. This allows foreign income and gains to remain outside the scope of UK taxation unless funds representing such income or gains are brought into the UK.

Understanding Domicile: Domicile is a concept in English common law relating to the country an individual regards as their permanent home. It is distinct from concepts such as nationality or tax residence. Individuals acquire a domicile of origin at birth, usually the domicile of their father. A domicile of choice can replace this if they move to another country intending to reside there permanently.

A person’s domicile impacts how they are taxed in the UK. Those domiciled in the UK are subject to UK income tax and capital gains tax on their worldwide income and gains. However, individuals domiciled outside the UK who become UK tax residents can benefit from preferential tax treatment. As long as they retain their non-UK domicile status, they can use the remittance basis to avoid UK tax on their foreign income and gains.

How the Remittance Basis Works

UK resident individuals who are not domiciled in the UK and do not have a deemed UK domicile are eligible to use the remittance basis. This allows them to only pay UK tax on foreign income and gains when funds representing those amounts are brought into the UK, known as a taxable remittance.

This compares favourably to UK-domiciled residents who pay UK tax on worldwide income and gains on an arising basis. For them, foreign earnings are immediately taxable when they arise, regardless of whether funds are remitted to the UK. Under the remittance basis, foreign income and gains remain outside the scope of UK tax unless and until they are remitted. Tax on such amounts can be deferred indefinitely if no remittance occurs.

Importantly, ‘clean capital’ – including pre-residence income/gains and inheritances – can be remitted tax-free. This capital can be used to fund UK expenditures without triggering UK tax on foreign income and gains. Maximising and preserving clean capital is, therefore, a priority.

Claiming the Remittance Basis

The remittance basis is not applied automatically. Non-domiciled residents must actively claim it by completing the appropriate box on their UK tax return. This election can be made annually with the flexibility to change between the arising and remittance basis year-on-year.

For the first seven tax years of UK residence, the remittance basis is available without charge. However, a tax charge subsequently arises:

• Years 7-12 of residence: £30,000 annual remittance basis charge
• Years 12 onwards: £60,000 annual remittance basis charge

This charge is effectively a fee for continued access to the remittance basis. Payment does not impact tax on remitted foreign income and gains.

Making a Taxable Remittance

Care must be taken to avoid inadvertent remittances of foreign income and gains triggering unwanted UK tax charges. A remittance occurs when funds representing or derived from such amounts are brought into the UK. The scope of what constitutes a remittance is broader than simply transferring money into a UK bank account.

Actions of ‘relevant persons’ connected to the taxpayer can also cause a remittance for them. Relevant persons include spouses, minor children and some trusts. In addition, payments or uses of money outside the UK can result in a UK remittance in some circumstances. Comprehensive advice is needed to understand remittance risks.

Planning as a Remittance Basis User

Significant tax planning opportunities are available to remittance basis users to manage their exposure to UK taxation. A key priority is segregating clean capital from income and gains that have not been taxed in the UK. This enables clean capital for UK spending without causing a taxable remittance. Sophisticated bank account arrangements are required to achieve effective segregation.

Investment portfolios can also be structured to keep different types of funds separate. This may involve ring-fencing a core of clean capital and operating secondary portfolios for foreign income/gains still need to be remitted. Carefully selecting which assets to hold is important. UK investments producing UK income/gains are taxable on the arising basis regardless of remittance basis claims. Non-UK assets producing foreign investment income avoid this.

Giving income and gains to non-UK relatives can allow them to be effectively converted to clean capital. This is because inherited funds qualify as tax-free clean capital.

Managing Bank Accounts

Implementing suitable banking arrangements is a critical element of managing tax exposure. The goals are to:

• Maintain clean capital in separate accounts from foreign income and gains
• Use clean capital accounts to fund UK spending
• Use overseas accounts holding foreign income/gains for non-UK spending

These arrangements should be established before becoming UK tax residents to avoid mixing funds. Advice is essential to implement a bank account structure that delivers the desired segregation.

Selecting Suitable Investments

Remittance basis users must take care when selecting which assets to hold in their portfolios. Assets that produce UK source income or gains on disposal are immediately taxable regardless of remittance claims.

Ideally, investment portfolios would only hold non-UK assets, not subject to tax on the arising basis. In practice, some mixing of gains, income and capital within a portfolio is often inevitable. Implementing a segregated sub-portfolio for clean capital provides more flexibility.

Certain opaque offshore investments are unsuitable for remittance basis users due to income/capital mixing issues. Expert advice on investment structuring is highly recommended.

Employment and Directors’ Duties

Salaries and other earnings related to UK duties are fully taxable even under the remittance basis. But foreign earnings may qualify for remittance treatment. This enables non-doms to defer UK tax, where they perform duties entirely outside the UK.

However, detailed rules apply in specific cases after the first three years of UK residence. Foreign earnings are not protected after this point in certain circumstances. These include where earnings are not subject to a substantial overseas tax burden.

Consideration must also be given to avoiding UK tax presence for foreign companies individuals are involved with. Performing board duties in the UK could make the company a UK tax resident.

Non-Resident Trust Planning

Many non-domiciled UK residents create non-resident trusts or benefit from trusts set up by relatives. As well as succession planning benefits, this can provide tax advantages.

As long as the settlor retains non-domiciled status, there is usually no UK income tax or capital gains tax on the trust’s income and gains. This remains the case even if UK resident beneficiaries receive trust distributions.

However, care must be taken to avoid UK tax charges. Distributions into the UK, UK-situated assets held by the trust and the settlor becoming deemed domiciled can all create tax exposure.

Buying UK Residential Property

Purchasing UK residential property via companies or trusts is rarely tax-efficient. However, non-doms should still take advice regarding the appropriate acquisition structure.

Mortgage finance should be considered even for cash purchasers. Unlike cash, mortgage debt can reduce property value for inheritance tax purposes.

Historically, some remittance basis users have acquired properties with cash and later ‘geared up’ via mortgages. But tax changes have significantly restricted the Inheritance Tax effectiveness of this approach.

Maintaining Non-Domiciled Status

To retain access to the remittance basis, individuals must preserve their non-UK domicile status. This requires remaining tax residents here without the intention to stay permanently.

Indicating links and intentions to leave the UK eventually are helpful to evidence retained domicile. Steps can include:

• Maintaining property and interests overseas
• Making statements about plans to leave
• Preparing a dedicated domicile statement
• Ensuring wills, power of attorney and succession plans are consistent

Non-domiciled status should be periodically reviewed. Challenges from HMRC are increasingly common after long periods of UK residence.

Preparing for Deemed Domicile

Those with a non-UK domicile of origin are deemed to acquire a UK domicile for tax purposes once they have been UK residents for at least 15 of the previous 20 tax years.

Preparation is needed in the years before this deadline to mitigate the impact. Steps might include:

• Placing assets into trust structures
• Maximising available reliefs and allowances
• Accelerating planned lifetime gifts
• Transferring ownership of retained non-UK assets

Once deemed domiciled, the arising basis applies, so the remittance basis has very limited benefit. However, with proper planning, the overall tax impact can be managed.

The remittance basis regime provides significant tax advantages to eligible non-domiciled UK residents. But it is complex, with strict rules that must be followed to prevent inadvertent tax charges.

Taking specialist advice on structuring affairs is essential, as is implementing appropriate arrangements before becoming a UK tax resident. Early preparation for deemed domiciled status is also key for those committed to remaining in the UK permanently.

Non-domiciled individuals can often achieve very tax-efficient UK residency with proper tax planning using the remittance basis. Contact our tax advisors for assistance on compliance on Remittance Basis for Non Domiciled UK Resident.