So what exactly is a ‘non-dom’ and how is it connected to your tax status?
A person’s domicile is an important factor when it comes to deciding on their tax status. The term ‘non-dom’ is used to describe a person who for tax purposes has a domicile outside the UK.
The non-dom status generally brings with it certain tax benefits, however, recent changes in UK tax legislation may go some way to reducing, or in some cases eliminating, these benefits.
What is meant by ‘domicile’?
Although ‘domicile’ is not strictly a tax term, it does carry a legal definition and therefore can also be used in a tax context.
When you are born, you automatically have a domicile, your domicile of origin. You can only ever hold one domicile at a time.
Throughout your life, you will continually hold a domicile, although the details of that domicile may change over time and more than once.
There are rules around what decides your domicile, and the results are not always obvious.
Domicile may be confused with residence, citizenship or nationality, but these concepts are all very different.
Within the overall concept of domicile, there are three distinct categories:
Domicile of origin
Your domicile of origin is intrinsically linked with the details of your birth and therefore not necessarily as straightforward as you might initially think.
If you were born to married parents, your domicile of origin will be the same as your father’s then domicile.
If your parents weren’t married when you were born, you will take your mother’s then domicile.
If you are adopted, you will take the domicile of your adopted father, or in the absence of an adoptive father, the domicile of your adopted mother.
To discover the domicile of the corresponding parent, you may need to carry out a level of investigation. Never assume.
Domicile of dependency
Until you are 16 years old, your domicile will correspond to the relevant parent, as mentioned above. If the domicile of that parent changes while you are still under 16 years of age, then your domicile will change to that as well.
This is the domicile of dependency, whereby your domicile as an individual under 16 years of age is dependent on that of your relevant parent.
This category of domicile is also used for women who married prior to 1 January 1974, taking their husband’s domicile at that time. If their husband’s domicile changes, theirs will follow suit.
Domicile of choice
Once you have reached the age of 16 years old, you have the ability to take a new domicile. This is called your domicile of choice.
To take a new domicile, you must settle in another country or region with the intention of making it your permanent dwelling place and take steps to demonstrate this intention of permanent settlement.
It is not necessary to completely sever ties with the previous place where you were domiciled. You may still hold a passport and continue to be a citizen there, but still be domiciled to a different country.
Although you do not have to seek a passport or citizenship of your new country of domicile, your choice to not do so may be used to decide whether you have in fact settled in a new country and changed domicile.
The responsibility to prove that a domicile has changed is down to the person claiming that the change has occurred. Therefore, in the situation where HMRC wishes to prove that a person without UK domicile of either origin or dependency has taken a domicile of choice in the UK, the onus would be on HMRC to prove this.
Equally, where a person who has UK domicile of choice status claims to have taken a domicile of choice in a foreign country, it is their responsibility to prove this.
Any claim of change of domicile and permanent settlement in a new country will require the provision of strong, sound evidence to persuade the HMRC, or indeed the courts who hold the opinion that the concept of domicile is rarely straightforward.
HMRC are, however, unlikely to challenge individuals with a non UK domicile with the claim that they have taken a UK domicile, regardless of whether they have substantial UK interests or have been UK residents for a number of years.
What is ‘deemed domicile’?
In the context of inheritance tax and prior to 5 April 2017, any person who held UK resident status for 17 of the previous 20 tax years was treated as a ‘deemed domicile’ in the UK.
Since 6 April 2017, however, new rules apply to the concept of deemed domicile when one of the following two conditions comes into play:
- ‘Condition A’ relates to long term UK resident non doms. In this instance, deemed domicile status comes into effect for all tax purposes, including inheritance tax, when the period of UK residence is 15 out of the previous 20 tax years, a reduction from the usual 17 years.
- ‘Condition B’ relates to non doms born in the UK with a corresponding UK domicile of origin at that time who later take up a foreign domicile. In this instance, the non dom will be granted deemed domicile status for all tax purposes for any tax year during which they are a UK resident. Under Condition B, individuals born in the UK who later lost their UK domicile status may be treated as a deemed domicile for all tax purposes once they enter the UK, regardless of whether they have any financial ties with the UK.
The potential advantages of non dom tax status
Where a non dom is not recognised as a deemed domicile in the UK, there are several potential tax advantages available.
Where a non dom individual has foreign income or gains amounting to no more than £2,000 that is not brought to the UK, it is not necessary to pay tax on this amount or state it in a tax return.
However, where the non dom’s foreign income is over £2,000 in a tax year, tax is payable and the amount must be reported in their tax return. The non dom may then choose whether to pay the UK tax or make a claim on the remittance basis.
Under the remittance basis, income and gains only incur UK tax if they are brought to the UK, for instance, paid into a UK bank account.
Should a non dom make a claim under the remittance basis, however, they will lose certain personal allowances and exemptions, and where they have been resident in the UK for several tax years, the use of the remittance basis will incur an annual charge.
Foreign Worker’s Exemption
Where a non dom works both in the UK and overseas, they may be eligible for the foreign worker’s exemption, under the following conditions:
- income derived from working overseas amounts to £10,000 or less
- any foreign income other than this amounts to £100 or less
- overseas income is taxable in the country where it was earned, regardless of whether any tax was due
- income derived from working overseas and in the UK, in combination, are not more than the income tax basic rate
Overseas Workday Relief
Where a non dom is seconded to work in the UK, they may be eligible for Overseas Workday Relief.
Overseas Workday Relief treats part of the income earned from employment in the UK as a foreign source of income, under the following conditions:
- employment is carried out overseas either partly or in entirety
- a claim has been made under the remittance basis
- the resulting income is not brought to the UK
Non doms are eligible to claim Overseas Workday Relief in the first three years of UK tax residence, as long as they were not resident in the UK during the three years before that.
It is usual practice for assets located overseas that are owned by a non dom to be treated as excluded property for the purposes of inheritance tax. Inheritance tax charges on death or in relation to lifetime transfers do not, therefore, apply to excluded property.
Excluded property in relation to a non dom may include:
- overseas assets that are held in trust where the settlor has non dom status at the time of settlement, regardless of whether that
- non dom takes a UK domicile or a deemed domicile at a later date
- foreign currency bank accounts overseen in the UK by non UK residents
- holdings in open ended investment companies or authorised unit trusts
- exempt UK government securities where the beneficial owner is a non UK resident
- works of art located in the UK for public display, or cleaning and restoration
Non dom tax status – key points
There are many advantages to acquiring a non dom tax status, including tax exemptions and relief, and protection from inheritance tax, but any individual holding non dom tax status or wishing to acquire this status must remain informed on their personal domicile situation, and exactly how that will apply to and impact on their personal circumstances.