The primary benefit of being domiciled outside of the UK, is that once a claim is made, you will be eligible to use the remittance basis of taxation. Here we answer some of the commonly asked questions about the remittance basis and the tax benefits it may offer.
What is the remittance basis?
The remittance basis allows UK tax charges to be deferred on foreign income that is kept outside of the UK. It is only available to those taxpayers who are either UK resident, but not ordinarily resident, or who are not domiciled in the UK.
Once foreign income is brought into the UK (i.e. remitted) it will become taxable. In order to benefit from this preferential tax treatment, an annual ‘stand-alone’ tax charge of £30,000 will usually need to be paid if you have been resident in the UK for more than 7 of the last 9 tax years. There is a higher charge of £60,000 for individuals who have been resident in the UK for more than 12 out of the last 14 years.
The claim is made when submitting your annual tax return and it is possible for you to ‘opt’ in and out of using the remittance basis. A claim may not be necessary if the total foreign income arising in a tax year is less than £2,000.
Bringing offshore income / gains to the UK
From 6 April 2017, anyone who has been resident in the UK for 15 out of the last 20 tax years is no longer able to claim the remittance basis. The rules surrounding the remittance basis are complex and if not heeded can result in unintended tax charges. For example, there is anti-avoidance legislation that prevents other people or entities bringing funds back into the UK if they are intended to be used for your benefit. Additional tax charges can also arise if the funds are brought back into the UK in the wrong order. It is therefore important that if you decide to utilise your non-UK domiciled status and use the remittance basis that professional advice is sought before you bring any funds into the UK from offshore.
So what are the tax benefits of my domicile status?
There are numerous tax benefits that may be obtained if you are not domiciled in the UK and you make a claim for the remittance basis to apply, as outlined below;
1. Income Tax
Where income is earned and retained offshore, UK tax may not become chargeable in respect of that income until it is brought into the UK. In some circumstances, it may even be possible to transfer or convert UK based income producing assets or companies into offshore entities to obtain these benefits. However, there is complex anti-avoidance legislation to negotiate and it is usually necessary to have a genuine commercial reason for re-locating assets in an offshore jurisdiction before such benefits can be secured.
2. Capital Gains Tax (‘CGT’)
Foreign gains can benefit from the remittance basis of tax. Again, where a claim is made, CGT will not be payable on the gain until it is brought into the UK. Certain offshore tax structures can be put in place to allow some UK gains to benefit from the remittance basis.
3. Inheritance Tax (‘IHT’)
If you are not domiciled in the UK, you may also be able to secure IHT benefits. Generally speaking if you are UK domiciled or ‘deemed’ to be UK domiciled (i.e. you have been UK resident for 15 out of the last 20 tax years from 06/04/17 or prior to 05/04/17) you will be liable to pay UK IHT on the value of your worldwide assets when you die.
For some jurisdictions (India, Pakistan and Italy) there are beneficial tax treaties which, with the correct structuring, will remove offshore assets from the charge to UK IHT. If you are not from one of these jurisdictions, but are unlikely to become ‘deemed’ UK domiciled before you die, again charge to UK IHT on offshore assets can be reduced.
In order to secure the above tax benefits, it is usually necessary to put in place an offshore tax structure. Negotiating the legislation in this area can be difficult and due to its complex nature, professional advice should always be sought. The UK Tax Association has offshore planning experts who would be happy to discuss the benefits of offshore structuring with you in more detail should you be interested in doing so. Please contact us here if you would like to speak to one of our experts.