The tax position of individuals who are UK tax resident non-domiciliaries (RNDs) is complex. The default tax position for individuals who are UK tax resident is that they are subject to UK tax on income and gains as they arise, whether or not the income or gains arise in the UK.
By contrast, RNDs have the possibility of being taxed on “the remittance basis’, that is they are only taxed on income and gains arising outside the UK if and when it is remitted into the UK. The current note is intended to provide an overview of the position. The three major questions are:
- Whether or not an individual is UK tax resident;
- Whether or not an individual is UK domiciled;
- Whether the remittance basis of taxation applies in particular circumstances.
It is an area of law subject to regular and increasing challenge by the UK tax authority, Her Majesty’s Revenue and Customs (HMRC). Where no agreement can be reached, cases will be litigated and the judgement of lower courts can be appealed to higher courts. The tax consequences can be very substantial. The precise fact pattern of each individual case is crucial. Small variations in fact pattern can have large consequences. The position is complex and the last few years have seen an increase in complexity with the introduction of further legislation. Consequently, individuals should consider taking advice specific to their individual circumstances.
It is not unusual for RNDs to be involved in an offshore trust, for example as settlor and/or as beneficiary. Again this involves complex legislation which has become even more so since 2017. The current note does not consider offshore trusts in any detail. As above, for any RND who has an interest or a potential interest in an offshore trust, serious consideration should be given to seeking advice specific to their individual circumstances.
With these caveats, it is hoped that the current outline may be of some interest.
1 Whether or not an individual is UK tax resident
Prior to 2013 there was very little legislative guidance. However, there was a substantial body of case law which provided ample scope for disagreement. The UK Finance Act 2013 introduced the Statutory Residence Test which was meant to provide more certainty. Most advisers agree that it did so although there is a gap between “more certainty” and “complete certainty”. In brief, there are three tests:
A) Does an individual meet the criteria to be automatically classed as not UK resident?
B) Does an individual meet the criteria to be automatically classed as UK resident?
C) If neither A nor B applies, the question is whether there are “sufficient ties” to make the individual UK resident, for example family tie, accommodation tie, work tie. The more ties one has, the less time needs to be spent in the UK before becoming UK resident.
For some cases the answer is easy but in others the answer is nuanced. Apart from the legislation, there is HMRC guidance on how they believe the legislation should be applied and a developing case law.
Crucially, the question applies to each tax year. So while an examination of the facts may indicate an individual to be UK tax resident in, say, 2020/21, a slight change in life-style may change the status to non-UK resident in 2022/23. Or vice versa.
2 Whether or not an individual is UK domiciled
In principle, in considering domicile in the UK, the question needs to be considered in relation to each country of the UK, for example whether it is English or Scottish domicile. For this note we do not distinguish.
There are different sorts of domicile, for example domicile of origin, domicile of choice, domicile of dependency.
One starts life with a domicile of origin which is acquired from one’s father. Depending on the mobility of a family, a child’s domicile of origin can involve a consideration of domicile for the father or even the grandfather. Assuming a non-UK domicile of origin, a question can arise as to whether that individual subsequently acquired a UK domicile of choice. The word “choice” is misleading since a domicile of choice is not a matter of individual choice. It arises from a review of the facts of one’s life and deciding what that reveals about intention.
There is very substantial case law around domicile and the difficulties which sometimes arise in reaching a conclusion are reflected in the judgements. The difficulty is well summarised in the words of one judge: “Domicile cases require for their decision a detailed analysis and assessment of facts arising from that most subjective of all fields of enquiry – a man’s mind.”
Domicile is a common law concept. However, there is also an element of statutory definition.
Prior to 2017, there was legislation in place which meant that if an individual has been resident in the UK for 17 out of 20 years then that individual was “deemed domiciled” in the UK for the purposes of inheritance tax (IHT). The major impact of that was to bring in to the UK IHT calculation assets held by the individual outside as well as inside the UK.
The deemed domiciled legislation was substantially expanded with effect from 6 April 2017. From that date, if an individual has been resident in the UK for 15 out of the last 20 years, then the individual is deemed domiciled for income tax and for chargeable gains tax as well as for IHT. That means the advantages of the remittance regime are no longer available to the individual. (Where there is an existing offshore trust certain advantages can continue subject to strict rules. As previously indicated, offshore trusts are outside the scope of the current note.)
3 Whether the remittance basis of taxation applies in particular circumstances
As indicated above, the default position for individuals who are tax resident in the UK is that they are subject to UK income tax and CGT on their worldwide income and gains as they arise, often referred to as “the arising basis”.
By contrast, RNDs have the right to be taxed on “the remittance basis” of taxation. This is a right but it is NOT automatic. It has to be claimed for each tax year. It is possible to claim for one year but not another. There can be a significant annual charge for claiming the right depending on how long one has been tax resident in the UK.
With effect from 6 April 2017, the right to claim the remittance basis of taxation ceases when one has been resident in the UK for 15 out of the last 20 years. At that point one becomes “deemed domiciled”.
In theory, it is possible to reset the clock. For example, if an individual has been UK resident for 14 years but then leaves the UK and ceases to be resident for 6 years, on return to the UK the clock is “reset” to zero and there will be another 15 years of entitlement to the remittance basis. HMRC are aware of this advantage and will consider two major challenges:
(i) Whether the individual has met the requirements of the Statutory Residence Test for the 6 years in question.
(ii) Whether, at some point in the past, the individual acquired a UK domicile of choice. If so, while the clock has been reset for the statutory definition of “deemed domiciled”, nonetheless the individual has lost the right to the remittance basis. This is because under common law he has acquired a domicile of choice and so the advantages of being non-domiciled do not apply. In principle it is possible to lose as well as acquire a domicile of choice. Any such argument tends to be subject to scrutiny by HMRC.
Assuming an individual has RND status, and assuming there has been a claim to the remittance basis of taxation, a question can then arise as to whether a particular transaction constitutes a remittance. If there has been a remittance, consideration must be given to the tax consequence.
For example, if a sum of money is moved from the offshore bank account of Mr X to the UK bank account of Mr X then a remittance has been made. The question which then arises is whether the remittance consists of pure capital, or is a remittance of income, or is a remittance of CGT or is a combination thereof. This will affect the tax rate applicable. It is not a matter of choice. HMRC will tax on the basis that income comes first, then CGT then pure capital. Depending on the sophistication of the accounting records, differentiating between different sources can be challenging. In some instances, HMRC may be persuaded to accept estimates.
The above example of a transfer from an individual’s offshore bank account to a UK bank account is obviously a remittance. Case law is littered with instances where the answer is less obvious. These can involve transactions such as gifts, or loans, or investments. A decade ago most such questions were resolved via the courts as to whether the transaction in question constituted a “constructive remittance”. Since then, there has been a growth in legislation designed to specifically catch such transactions. However, there are still instances where there is scope for disagreement on whether or not a particular transaction constitutes a remittance.
A further area of complexity is whether or not the individual RND has fallen foul, even if inadvertently, of UK anti-avoidance legislation. This is wide-ranging and expanding. Two aspects which can often impact RNDs are: the Transfer of Assets Abroad legislation (TOAA); and what is usually referred to as ‘section 13’ legislation.
TOAA is designed to counter the avoidance of UK income tax where assets are transferred to non-UK resident entities, for example an offshore company. It can bite even where the transfer precedes the individual becoming UK resident.
Section 13 legislation is designed to counter the avoidance of UK CGT by the use of a non-UK company which, had it been in the UK, would have qualified as a “close company”.
Both pieces of legislation have been drafted to have broad application. Although designed for similar purposes, they work differently. For example both have a “motive defence” but the bar is set higher for TOAA.
Conclusion
There remain very significant UK tax advantages to RND status. However, where individuals proceed on the basis that they are entitled to such advantages, even if they proceed in good faith, where it is subsequently established that they are not entitled to such advantages there can be severe tax consequences. Apart from the tax itself, individuals can find themselves exposed to interest for late payment of tax and to consequences which can include reputational ‘naming and shaming’ as well as substantial financial penalties.
These risks need to be considered in an environment where there are now mechanisms in place requiring tax jurisdictions to share information about persons who have links to other jurisdictions. This increases transparency. As indicated in comments above, there is increasing complexity which increases the possibility of getting things wrong. There is a penalty regime with draconian consequences if one does so.
RND status continues to be desirable but there are dangers. Please:
- Establish what your status is
- Seek advice on how best to use it to your advantage
