In recent days, the financial news has been abuzz with speculation about Chancellor Jeremy Hunt’s potential reforms to the UK’s non-domiciled (‘non-dom’) tax status in the upcoming budget announcement. While it’s tempting to dive into predictions and potential outcomes, I believe such speculation is best left until after the official word is released (more to follow later this week!). However, this flurry of attention sheds light on a critical area of the UK tax system that remains a mystery to many outside the realms of tax law and financial consultancy. If terms like ‘non-dom’ and its implications on asset management sound foreign to you, you’re not alone. In a landscape where managing assets crosses borders and tax regulations, understanding the role of non-dom status in the UK becomes crucial for those residing there yet having ties elsewhere. Let’s demystify this concept, starting with the basics of what it means to be a non-dom in the UK, and explore how it affects the management of assets and bank accounts – the core interests at the heart of this discussion.
What is a Non-Dom?
In essence, a non-dom in the UK landscape is someone living within its borders but, for tax reasons, isn’t seen as domiciled there. This notion can seem quite foreign and a bit peculiar to those from abroad. In many countries, your domicile—the term itself hailing from the Latin “Domus,” meaning home—is simply where you live. Yet, under the UK’s common law tradition, it’s defined more uniquely by reference to a vast and complex body of case law that, very broadly, looks at where an individual intends to reside permanently and indefinitely. This distinctive approach to determining one’s domicile plays a pivotal role in the UK’s tax framework, especially for individuals who may call the UK their residence but originate from elsewhere.
What are the tax consequences?
A word of caution to start: We are not tax consultants, nor do we claim the expertise to offer tax advice. Yet, it’s within our purview to explain, in broad strokes, the tax choices available to non-doms, especially concerning their income and gains from abroad. They face a critical decision between two main tax regimes:
- Remittance Basis: Here, non-doms are taxed solely on the income and gains from overseas that they, or people closely connected with them, choose to bring into the UK. Any earnings not remitted remain beyond the reach of the UK taxman. However, it’s important to note that after residing in the UK for a certain duration, opting for this basis incurs a charge.
- Arising Basis: On the flip side, non-doms could opt for a taxation model that applies to their global income and gains, irrespective of whether these funds make their way to the UK.
In our practice, managing the fortunes of the highly affluent, the remittance basis is often the path of choice. The allure is undeniable: Imagine a billionaire residing in London, deriving large dividends from a European enterprise. So long as these profits don’t cross into UK territory, they escape UK taxation entirely.
Yet, herein lies the complexity. Defining what constitutes a “remittance” and ensuring its accurate tracking can be fraught with difficulty. Missteps in this arena could lead to significant financial repercussions.
Managing assets and bank accounts
There are a host of potential banana skins when it comes to ensuring a client does not accidentally remit the wrong kind of assets. Afterall, if the client remits funds that are considered “clean capital” (for example, gifts, inheritances, or income/gains that arose before becoming UK resident), no UK tax is payable. If “gains” are remitted, CGT is payable, and if “interest” or “income” is remitted, income tax is payable, particularly painful if you are a higher or additional-rate taxpayer.
The concept of clean capital is crucial for non-doms using the remittance basis of taxation because it allows them to manage their funds in a way that minimizes their UK tax liability. They can bring clean capital into the UK without triggering a tax charge, which provides flexibility in managing their finances outside and inside the UK.
However, it’s essential for non-doms to keep accurate and separate records of their clean capital, taxable income, and gains to ensure compliance with UK tax regulations. Mixing clean capital with other funds can complicate the tax situation and potentially result in unintended tax liabilities. This process of keeping funds separate and untainted is often referred to as “segregation of funds,” and it’s a critical part of tax planning for non-doms.
This is more difficult than it sounds, and over the years, I have seen many private clients get this wrong. Some common mistakes are:
- Mixing clean capital, gains, and income in one bank account
When funds from a mixed account—comprising clean capital, gains, and income—are transferred to the UK, tax authorities deploy a hierarchical approach to taxation, prioritizing income and gains over clean capital. Consider a scenario where an account holds $10 million: 50% as clean capital, 30% as gains, and 20% as income. Should $1 million be remitted, the tax calculation first addresses the income component. Only if the remitted amount surpasses the income will it start to eat into the gains, with clean capital touched last. This methodology aims to curb tax avoidance by ensuring that taxable amounts are utilised prior to clean capital. Meticulous record-keeping of the origins of funds and their remittance is crucial for adherence to tax regulations, prompting many to seek expert advice for these intricate matters. The complexity escalates with portfolio management. Imagine allocating $10 million of clean capital across bonds and equities. Without segregating the resulting coupons and dividends into distinct accounts, your initial clean capital becomes entangled with new income and gains, complicating its tax status further.
- Paying an invoice to a UK based company, or even to the UK bank account of a foreign company
Picture this scenario: You’re eager to secure a villa in St. Tropez for a sun-drenched summer getaway. A French agent is enlisted to find the perfect spot and manage the booking. Observing your UK residency, they, aiming to simplify the process, furnish you with their London bank account for payment. A swift transaction from your Swiss account later, and unbeknownst to you, you’ve inadvertently executed a remittance.
Your journey to the villa involves chartering a private jet for a family adventure from Farnborough to Nice. Keen to avoid previous mishaps, you insist the French charter company provide their local bank details. Another transfer from your Swiss account follows, and lo and behold, you’ve repeated the oversight! In this case, by paying for a service consumed in the UK, you’ve effectively made another remittance.
Settling into the French Riviera lifestyle, you confidently use your UK issued Amex for every transaction, reassured by the belief that expenses incurred abroad won’t count as remittances. Regularly topping up the card throughout the summer, it seems you’ve covered all bases. Yet, the twist comes when you realise that by replenishing a UK-based card, even while basking in the French sun, constitutes yet another remittance. Thus, through seemingly innocuous actions, the spectre of unintended remittances looms thrice over.
- Investing in UK assets within your Swiss portfolio
Suppose you’ve entrusted a discretionary portfolio to be managed from the serene confines of Switzerland. Your portfolio manager, exercising due diligence, opts to invest in bonds issued by reputable UK banks. While the initial acquisition of these bonds might not directly fall under the category of a remittance, the subsequent financial movements certainly attract Her Majesty’s Revenue and Customs’ (HMRC) interest. Any coupon payments received (or dividends, should you veer towards equities) find themselves within the grasp of UK taxation. Moreover, deciding to part with these assets, if resulting in gains, also subjects those gains to UK tax scrutiny. And to cap it off, should these assets remain within your portfolio, they may very well find themselves under the spotlight for inheritance tax assessments, making their presence felt across various facets of the UK tax regime.
Summary
Navigating the intricacies of non-dom tax status and the management of international assets requires not only a keen understanding of the UK’s tax laws but also a vigilant approach to financial transactions and investments. Through various scenarios—from booking holiday villas in St. Tropez to managing portfolios with UK assets—it’s clear that the path not only to tax compliance, but tax optimisation, for non-doms is fraught with potential missteps. Each transaction, whether it’s paying for a service via a UK bank account or investing in UK securities from abroad, carries implications for remittance and, by extension, UK tax liability.
In the realm of asset management, the distinction between clean capital, gains, and income is pivotal. Mixing these can lead to unintended remittances, with the tax authorities ready to prioritise taxable income and gains over clean capital. Moreover, seemingly straightforward actions, like using a UK-issued credit card abroad or managing investments through UK entities, underline the complex nature of remittance and the need for meticulous financial planning.
Given these complexities, our advice and services are tailored to support high net worth individuals and their unique challenges. We offer expert guidance on segregating funds, understanding the nuances of remittance, and planning investments to optimise tax efficiency. Our experience highlights common pitfalls and provides bespoke solutions, ensuring that your wealth is managed with both your current lifestyle and future legacy in mind.
For those navigating the intricate landscape of non-dom tax status, our team stands ready to assist, supported externally by a close circle of recommended tax experts. We provide clarity amidst complexity, ensuring that your financial decisions are both compliant and strategically sound. Whether you’re investing in global markets or planning your next holiday, our expertise is your safeguard against the unforeseen tax implications of your global lifestyle.
Robert Edwards,
Managing Partner
Your success, our expertise
