Australian expats in the UK: The tax advantage of non-domicile status

This blog article talks about the Australia and UK tax advantage of non-domicile status.

Australian expatriates residing and working in the UK, classified as “non-domiciled,” might enjoy tax advantages in comparison to individuals domiciled in the UK.

A UK resident and domiciled individual will be subject to UK tax on both their UK and foreign income. On the flip side, a UK resident who is not domiciled may choose to pay taxes on only the foreign income they bring into the UK.

How does one determine a person’s domicile?

This is often a complex area of law. Typically, your domicile is based on your father’s domicile at the time of your birth.

Everyone starts with a “domicile of origin”, and if your parents were married, this will be the domicile of your father.

A person may acquire a “domicile by choice” in another country if they decide to move permanently to a different country.

However, starting in 2017, the introduction of new rules means that an individual becomes “deemed UK domicile” for all UK taxes if:

• They are UK resident and non-domiciled for more than 15 out of the past 20 tax years; or
• They were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).

Income tax and CGT

A UK resident non-dom can gain a tax advantage over a UK domiciled individual by choosing to utilize the remittance basis of taxation for foreign income and gains. This implies that the UK will only tax foreign profits, like the sale of an Australian property, when individuals or entities bring them into the country. However, it’s important to consider the following points:

• The remittance basis will apply automatically for foreign income less than £2,000;
• If unremitted foreign income or gains exceed £2,000 and you elect to use the remittance basis, you will lose your entitlement to your UK tax-free personal allowance and CGT annual exempt amount;
• There is no charge on claiming the remittance basis in the first six years, however thereafter a remittance charge is payable.

Whether it is beneficial to claim the remittance basis will depend on the amount of your foreign income and availability of foreign tax credits (noting the loss of the personal allowance and the Remittance Charge payable after year 7).

A “remittance” is interpreted widely by HMRC to include:

• Physical cash brought into the UK;
• Electronic bank transfers;
• The use of foreign credit cards in the UK;
• Purchase of assets in the UK; and
• Remittances of income by family members.

Understanding ‘clean capital’ involves a complex definition, allowing tax-free remittance into the UK. Sending money from an international bank account that holds a ‘mixed fund’ (comprising both clean capital and income) to the UK requires careful consideration, as it might potentially activate a taxable remittance. This realm of taxation is intricate, and we strongly recommend seeking advice before transferring such funds.

It’s worth noting that if you hold interest-bearing accounts in Australia or abroad, you might want to consider either closing these accounts upon relocating to the UK or redirecting the interest to a non-UK account. This strategy enables you to remit the underlying capital into the UK without incurring UK tax.

Inheritance tax

Previously, non-domiciled individuals were exempt from inheritance tax on non-UK assets. Starting April 2017, individuals without domicile status will face classification as “deemed domiciled” for inheritance tax if they reside in the UK for 15 out of 20 years. Consequently, they may become liable to UK inheritance tax on their global estate. It is crucial to undertake suitable tax planning in light of this development.

Please see our next article for more information on UK inheritance tax and how it impacts Australians in the UK, or if you have moved from the UK to Australia.

Disclaimer 

This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario.