Until recently few had heard of what is colloquially known as Res Non Dom (“non-dom”) tax status. Over the last few days this changed when the Labour Party announced that, if elected, they would close a 200 year old loophole in a move towards what they call responsible capitalism. We look briefly at why this issue is under the media’s spotlight.
What is domicile?
Domicile is a complex legal concept which determines someone’s liability to pay income tax, capital gains tax and Inheritance tax (IHT). You can only have one domicile at a time and you can never be without one. It represents where you come from and where you intend to spend the rest of your life. In very basic terms there are three types: (1) a “domicile of origin” which you are born with and usually reflects your father’s domicile; (2) a “domicile of choice” which may be acquired and (3) a “domicile of dependence”.
What is residence?
Residence is a tax issue determined by where you are physically at any one time however; unlike your domicile it is possible to have more than one.
Who can be a non-dom?
This can affect any individual whose father or grandfather (but not their mother) was domiciled outside of the UK at the time of their birth. This explains why there were media reports yesterday saying that non-dom status can be inherited.
Although only 116,000 people currently take advantage of this law the Treasury estimates that nearly 4.9 million people are potentially eligible. That said, the main advantage attaching to non-dom status, remittance based assessment, may not suit everyone and non-dom status may not be worth pursuing if you have insufficient overseas assets, you are unable to convince HMRC of your foreign domicile or double taxation reliefs assist you. It is therefore questionable how many of those eligible would want to take advantage of the remittance basis of assessment.
What are the tax advantages?
Prior to 2008 the election to be charged tax on a remittance basis could be made free of charge. Since 2008 an annual charge of at least £30,000 may be applied to protect non-dom status. In December Chancellor George Osborne announced a new £90,000 charge for non-doms who have lived in the UK for 17 of the last 20 years. So the charges are increasing and must be justifiable.
There are several advantages and these differ depending on the tax being considered. For Income tax purposes, residence can be key. If you are resident in the UK you normally pay tax on an “arising basis”, meaning you pay tax on both your income arising from inside and outside of the UK and your gains on any worldwide disposals. However, if you have non-dom status you will only pay tax on what arises in the UK and what assets you bring (or remit) into the UK. A non-dom does not pay tax on their income arising outside of the UK, if it is not remitted into the UK.
As for IHT while a UK domiciled individual will pay 40% IHT on their worldwide estate which exceeds the nil rate band a non-dom will only pay IHT on their UK estate and not their foreign assets, subject of course to the restrictions placed on them under the deemed domicile rules which mean that anyone resident in the UK for 17 out of the last 20 tax years is deemed to be domiciled in the UK for IHT purposes.
This is a key issue for all the parties. The Conservatives remain in support of it, subject to increased annual fees. The Lib Dems have suggested they would increase the annual charges and reform the eligibility criteria. Labour on the other hand has suggested they would be unlikely to permit such elections after April 2016 and would give those who have historically elected a limited period of time to sort out their tax affairs. They may however permit the status of non-doms to remain for limited periods of residency in the UK and a period of 2-3 years has been suggested in the press. This of course raises questions as to whether or not there would be deemed domicile provisions after this period of time has expired and how such people would be treated for income and capital gains tax as well as IHT, but we await further details to be able to comment further in any informed way.