Non-domiciled tax charge

Before the Finance Act 2008, individuals resident but not domiciled or those not ordinarily resident in the UK enjoyed the remittance basis’ of UK taxation, only paying UK income or capital gains tax when they remitted overseas income or investment gains into the UK.

Since 6 April 2008, a non-domiciled individual who has been resident in the UK for seven out of the past nine years, is only able to use the remittance basis of taxation if they pay an additional tax charge of £30,000 each year. From 6 April 2012, a yearly £50,000 remittance basis charge applied to claimants who have been resident in the UK in at least 12 of the previous 14 years, but this was increased to £60,000 from 6 April 2015.

Also from 6 April 2015, the charge for claimants who have been resident in the UK in at least 17 of the previous 20 years was £90,000. This charge was effectively removed by the changes made from 6 April 2017.

Where an individual elects to be taxed on the remittance basis they lose their income tax personal allowance and annual exemption for capital gains tax for that tax year. A non-domiciled individual has the choice each year of whether to pay the charge and claim the remittance basis, or to be taxed on all their worldwide income and gains whether they are remitted to the UK or not.

However, from 6 April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes and that change brought an end to permanent non-domicile status.

This means that from their 16th tax year of UK residence, non-domiciles will no longer be able to use the remittance basis and will be subject to tax on an arising basis on their worldwide personal income and gains.

This change effectively made the £90,000 remittance basis charge redundant.

The legislation was included in the Finance (No.2) Act 2017, which received Royal Assent on 16 November 2017, although these changes were effective from 6 April 2017

Planning opportunities using an international life assurance policy

An international investment bond policy is a ‘non-income producing’ asset that can provide UK resident non-UK domiciles or deemed-UK domiciled individuals with tax advantages allowing policyholders freedom to access an almost unlimited range of unit trusts, investment trusts and other acceptable pooled funds.

Holding assets in an international investment bond means that no liability to capital gains tax arises when assets are switched whilst held in the bond. Additionally, no UK income tax liability will arise provided that no withdrawals are made in excess of the cumulative 5% tax-deferred allowance, and provided that no other chargeable events occur. Such event may be the death of the last surviving life assured, if the bond is on a life assurance basis or maturity if on a capital redemption basis.

For these tax benefits to apply, the bond must be funded by a premium which is not made up of any previously unremitted non-UK income or gains. An individual could invest, say, £1m into a bond and withdraw £50,000 each year for 20 years without any immediate tax liability. Exit strategies are also available to reduce the final tax charge when the bond or any of the underlying policies are surrendered. 

Excluded property trust

Canada Life offers an excluded property trust for use by UK resident non-domiciled individuals. Where a non-domiciled individual has been resident in the UK for more than 15 out of 20 tax years then he or she will become ‘deemed domiciled’ for UK inheritance tax purposes and subject to UK inheritance tax on their world-wide assets.

This exposure may be mitigated by setting up an excluded property trust holding excluded property, such as an international investment bond, before the individual becomes deemed UK-domiciled. This document does not cover the benefits of an excluded property trust in detail and care should be taken when establishing one.

Further information regarding the excluded property trust can be found in our document ‘The Excluded Property Discretionary Trust Notes’.

This briefing note has been prepared for professional adviser use only.

The information regarding taxation is based on our understanding of current legislation, which may be altered and depends on the individual financial circumstances of the investor. We recommend investors seek their own independent tax advice.

It is based on our understanding of the draft legislation and as such, this information should only be treated as provisional until the legislation is enacted.

This briefing note can also be viewed as a PDF

This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.