Labour To Scrap Non Domicile Rules

Labour To Scrap Non Domicile Rules.

The Labour party has suggested today that should it be elected it would consider scrapping the non-domicile remittance basis charge tax rules.

What are the non-domicile tax rules?

UK residents who are born in Britain or born to a British father are usually domiciled in the United Kingdom. This is called a 'domicile of origin'.  UK residents who are UK domiciles are taxed on their world wide income and gains in the UK.  Domicile is a term peculiar to English Law and is usually applied for Inheritance Tax issues, but it also now applies, with effect 2008, to income and gains if you are UK resident but non-UK Domicile.  You acquire your 'domicile' status, usually at birth from your father.  Make no mistake, this has nothing to do with citizenship, passports, leave to remain etc. You can be a British Citizen with a UK passport and still be non-UK domiciled.

If you were born outside the United Kingdom or born to a non-British father you acquire your domicile from your father at birth (think of this as your homeland).  By being non-UK domicile you may be entitled to special tax status in the UK.  Why do you think so many super wealthy film stars, investment bankers, musicians and sports club owners live in the United Kingdom?  Read on ....

A UK resident who is non-UK domicile:

1. Must pay tax in the UK on their income and gains realised in the UK. 
2. They can also elect to be taxed in the UK on their worldwide income and gains (this is called an Arising Basis). Many 'average' foreign nationals do this.

However, non-UK domiciles who are resident in the UK also have the option to elect to be treated under the Remittance Basis (if they have wealth).

Remittance Basis User Explained:

Stage 1. Lived in UK Less than 7 out of 9

If you have been in the UK for less than 7 out of the last 9 tax years, you can claim the remittance basis.

Under the remittance basis, if you have less than £2,000 per annum overseas income you keep your full UK income tax personal allowance and capital gains tax allowances.

If your overseas income is over £2,000 per annum, you do not have to pay the Remittance Basis Charge, but you lose your personal allowance and capital gains tax allowance.  You are always taxed on any income or gains that arise in the UK.  In short, you pay no income or gains taxes on FOREIGN/OVERSEAS income/gains in the UK, but you pay more tax for UK derived income and gains as you have no allowances.

Stage 2. Lived in UK 7 out of 9

If you have been in the UK for more than 7 out of the last 9 tax years, you can claim the remittance basis.

Under the remittance basis, if you have less than £2,000 per annum overseas income/gainsl, you do not have to pay the Remittance Basis Charge of £30,000 in the UK to HMRC.

If you have over £2,000 per annum overseas income/gains, you must either:

1. Elect to be taxed on the arising basis i.e. taxed in the UK on Worldwide income and gains or
2. Pay the Remittance basis charge of £30,000 pa to HMRC and no questions asked about Worldwide income or gains.

Stage 3. Lived in UK for 12 out of 14 (Remittance basis charge increases)

If you have been in the UK for more than 12 out of the last 14 tax years, you can claim the remittance basis.

Under the remittance basis, if you have less than £2,000 per annum overseas income/gains, you do not have to pay the Remittance Basis Charge of £60,000 (£50,000 up to 05/04/15) in the UK to HMRC.

If you have over £2,000 per annum overseas income/gains, you must either:

1. Elect to be taxed on the arising basis i.e. taxed in the UK on Worldwide income and gains or
2. Pay the Remittance basis charge of £60,000 pa to HMRC and no questions asked about Worldwide income or gains (was £50,000 pa up to 5/4/2015).

Stage 4. Lived in UK for 17 out 20 (Remittance basic charge increases again with effect 6 April 2015)

If you have been in the UK for more than 17 out of the last 20 tax years, you can claim the remittance basis.

Under the remittance basis, if you have less than £2,000 per annum overseas income/gains, you do not have to pay the Remittance Basis Charge of £90,000 in the UK to HMRC.

If you have over £2,000 per annum overseas income/gains, you must either:

1. Elect to be taxed on the arising basis i.e. taxed in the UK on Worldwide income and gains or
2. Pay the Remittance basis charge of £90,000 pa to HMRC and no questions asked about Worldwide income or gains.

Remittance Basis Charge (RBC) Summary

This means that for some non-domiciles who have significant assets outside of the United Kingdom, provided they do not have large overseas income, they will not be taxed.  In addition, non-domiciles who have larger overseas incomes can pay a yearly tax payment, without any further questions being asked by HMRC about their worldwide income. As detailed above, the yearly tax charge for non-domiciles started in 2008 with a £30,000 yearly tax charge, this increased in 2012 to £50,000 yearly tax charge and this increases to £60,000 (for those having lived 12 out of 14 years in UK) and then a £90,000 yearly tax charge (for those lived 17 out pf 20 years in UK) with no questions asked. 

Why do you think so many super wealthy film stars, musicians and sports club owners live in the United Kingdom?  You now know the answer.

Labour has suggested that they have found a way to tax the foreign super wealthy and they believe it is fair to do so whereas the Conservatives prefer for the super wealthy to make a significant tax contribution via the above yearly remittance basis charge and then the super wealthy will still remain in the UK as well as paying a significant tax charge they will also be spending their wealth in the UK.

Some people have warned that the super wealthy will leave the UK if the remittance basis is removed, others suggest that they should not be here benefiting from the UK effectively being a tax haven.

We believe this is a difficult one to call: the Conservative approach of one of higher yearly tax charges (incidentally introduced by the Labour government of the time) and the newly proposed Labour approach of removing the remittance basis, both have their pros and cons.