Our tax year runs from 6th April to 5th April. For every individual it is necessary to determine their UK tax residence status to 5th April.
The general rule is that if an individual is UK tax resident for the year ended 5th April, they are liable to UK income tax and capital gains tax (‘CGT’) on their worldwide income and gains for that year whether or not enjoyed or remitted here. Further, the general rule is a UK tax resident individual to 5th April is fully within the scope of all of our tax anti-avoidance legislation including as it applies offshore the UK.
In addition to determining an individual’s tax residence status to 5th April, it is also necessary to determine their domicile status as at the same date. If they are UK tax resident but not UK tax domiciled on 5th April, their exposure to UK tax on their foreign source income and gains to 5th April which are not ‘remitted’ here can be kept outside of UK tax until remitted.
There are 3 types of domicile:
– domicile of dependency;
– domicile of origin; and
– domicile of choice.
It is a reasonable assumption that most new immigrants are not UK domiciled when they first move here. Being a non domiciliary allows you to elect to HMRC to (in my words) put up a wall to 5th April and keep all your non UK source income and gains for the year to 5th April outside of UK income tax/CGT unless ‘remitted here’. This is called the remittance basis of taxation.
Those eligible to claim the remittance basis need to be aware
that (i) there is a wide definition of ‘remitted’ including via a ‘relevant person’; and (ii) we have ‘ordering’ rules that govern the order in which we treat withdrawals from a non UK bank account as being withdrawn. In effect the most UK tax expensive money is deemed accessed first (e.g. sums taxable as income) before capital gains or the cost of the asset sold. These rules are called the mixed bank account rules.
A UK tax resident to 5th April who is an electing ‘non dom’ needs to know they can’t avoid having a taxable UK remittance to 5th April by e.g. giving wealth abroad to a defined group of people including a non UK company that then brings the otherwise taxable sum to the UK e.g. to make an investment.
There is a UK tax cost to elect to 5th April to HMRC to be taxed on the remittance basis. Every individual who makes the election is taxable in the UK from their first pound of taxable income or gains to 5th April. There is no access to a zero rate of tax.
In addition, as described below, there can be a tangible cost to making a ‘non dom’ election to 5th April.
Years UK resident Remittance basis charge
UK tax resident 7 of the preceding
9 tax years £30,000
UK tax resident for at least 12 of the preceding
14 tax years £60,000
UK tax resident for 15 or more of the preceding
20 tax years Ineligible to claim
A key tax planning point for non domiciliaries thinking of moving here is that if they realise non UK gains prior to 5th April in the year they plan to move here and prior to said 5th April they place such realised funds in a segregated wholly clean (never been used before) non UK account into which nothing further is ever added, this is a ‘clean capital’ account and funds from it can be remitted here free of any UK tax charge even once Person X is UK tax resident.
Issues to watch out for if X is planning to become UK tax resident for the first time in the year ending 5th April include inadvertently making
– His/her non-UK private company UK tax resident; and/or
– His/her offshore trust UK tax resident.
If you have any questions, please get in touch.