Non UK domiciliaries ('Non Doms') have a lot of tax advantages when compared to 'ordinary' UK residents. In essence the tax benefits are:

Income tax - they are only subject to UK income tax on overseas sourced income when they actually bring the income into the UK

Capital gains tax ('CGT') - they are only subject to UK CGT on overseas gains when they remit the proceeds back to the UK

Inheritance tax ('IHT') - they are only subject to UK IHT on their UK estate. Any overseas assets would be completely exempted from IHT.

You'll see that they have some pretty good advantages when it comes to overseas income and gains. Before looking at how to make the most of these lets see exactly what a Non dom is.

What is a Non dom?

You are normally domiciled in the country that you regard as your home - not the place where you happen to be temporarily living. Your domicile is, in a sense, the country that you regard as your true ‘homeland' and has frequently been described as the country in which a person intends to die.

It is therefore possible for a person to live in the UK for 40 years yet still remain legally domiciled in another country. Losing your UK domicile is substantially more difficult than losing your UK resident status.

While it is possible to be resident in two countries at the same time, it is only possible to be domiciled in one.

There are various types of domicile:

1. Domicile of Origin

A domicile of origin is acquired when a person is born. Under normal circumstances this is the father's domicile at the date of the child's birth. If the parents are unmarried, it is the mother's domicile that matters.

A domicile of origin continues unless the individual acquires either a domicile of dependency or a domicile of choice (see below). This new domicile will remain in force unless it is abandoned, in which case the domicile of origin is revived.

2.  Domicile of Choice

In order to acquire a domicile of choice, a person must voluntarily make a new territory his residence and intend to remain there for the rest of his days - unless and until something occurs to make him change his mind.

Obtaining a domicile of choice is primarily a question of intent. However, once such a domicile has been established it is relatively difficult to abandon. It would be necessary for an individual to cease to reside in the country of choice indefinitely. Later on in this guide we list some practical steps that can be taken to help establish a domicile of choice.

3.  Domicile of Dependency

This type of domicile only applies to children under the age of 16. A child's domicile of origin is replaced by a domicile of dependency if there is a change in the father's domicile (mother's domicile in the case of unmarried couples). If this happens, the parent's domicile of choice becomes the child's domicile of dependency. The child keeps this domicile unless the child does not live in the territory and never intends to live there. In this case the child's domicile of origin revives.

Therefore there are basically two types of non doms that we are usually interested in

Firstly there are foreigners who come to live in the UK. These will be UK resident but non UK domiciled. This means that they'll only be taxed on any foreign income/gains to the extent that remit the income/gain to the UK.

Secondly, there are the UK residents who leave the UK to live permanently overseas. Income tax and CGT won't be an issue, as they'll be exempted in any case as non residents. Here we are concerned with IHT, and in particular wherever possible ensuring that they can also get classed as non doms - thus preventing any assets they may own overseas from being with the UK IHT net.

Foreigners in the UK

When looking at the position of foreigners living in the UK, the first and most obvious piece of advice is to simply retain any income or proceeds overseas wherever possible. You could for example, invest the cash in an offshore account or invest in overseas property/investments. It doesn't really matter what you do with it provided you keep the cash out of the UK.

If the non dom has a significant UK income, this will probably be the best option - but what if they actually need some of that cash in the UK.

Technically you could simply gift the cash overseas to someone who could then bring it into the UK, however if you benefited from it after it came back into the UK, you could get into some tricky arguments with the taxman as to whether this was a 'sham' gift and whether the settlements legislation should apply.

A useful planning technique is to use separate capital and income accounts.

Capital and Income accounts

This is particularly useful where the non dom has some existing capital before they come to the UK.  To use this technique the non dom will have at least three overseas bank accounts:

The first account for any existing capital.

The second account to deposit the proceeds of any asset disposals.

The third account to contain the interest from the first two accounts, along with any other foreign source income.

The point of this exercise is to separate the foreign income and gains so that any cash that is brought into the company can be clearly tracked and remitted most tax efficiently.

If you want to bring money into the country you should first remit funds from the first bank account. This can usually be done tax free. If further funds are required, then withdrawals can be made from the second account, which would effectively subject the withdrawals to capital gains tax. However, it is possible these amounts will be tax free if they are covered by the annual exemption of £8,800. Finally, withdrawals from the third account would be subject to income tax.

Another advantage of utilising these accounts is that, for inheritance tax purposes, the foreign bank accounts of a non UK domiciliary will usually be outside the scope of UK inheritance tax.

Using an overseas company

If the non dom is planning to purchase UK assets (eg a UK property or other investments) they would be well advised to consider using an offshore company to hold the assets. This would then ensure that the non dom had no UK estate that would be chargeable to IHT. A related benefit is that UK probate should not be required on the death of the non dom.

UK emigrants

The second group of non doms we were concerned with were the former UK residents moving overseas.

IHT is the main issue here, and as such they should be looking at whether they can seek to change their domicile so that they are not UK domiciled. Any overseas property they own would then not be subject to IHT.

Changing domicile can be tricky and you'd essentially need to demonstrate that you had cut all ties with the UK and intended to make your new permanent home overseas. So aside from the usual actions such as selling UK property and acquiring property overseas, you'd also need to cease membership of UK clubs, make an overseas will, make any funeral arrangements overseas, join overseas clubs etc.

It's important to note that you will in all likelihood  be deemed UK domicile after you first leave the UK, as individuals are deemed to have a UK domicile:

·     If they have been UK resident for 17 out of the last 20 years, or
·     They have lost their UK domicile in the last three years.

In practical terms it is difficult for UK emigrants to convince the UK taxman that they have a non UK domicile.

A form, ‘DOM 1', is available from Inland Revenue which can be used where an individual considers they are non UK domiciled. However, it is only necessary for the Inland Revenue to consider your domicile if it is immediately relevant in deciding your UK income tax and/or capital gains tax liability. If you are non resident, this will not be an issue, as you will not in any event be subject to UK capital gains tax or income tax on overseas capital gains and income.

Therefore, by ticking the non domicile box in your tax return, or completing form DOM 1, the Inland Revenue is unlikely to enter into correspondence with you regarding your tax status, as your domicile will have no impact on your immediate UK income tax or capital gains tax liability. For a non resident, the only impact of non domicile status is for UK inheritance tax.

It can't be assumed that you are of non UK domicile if the Inland Revenue doesn't look into the issue during your lifetime. If you wish to determine your domicile position prior to death, there are methods available.

You'll see from the above that there are some pretty good tax advantages to being a non UK domiciliary. There are also other related advantages such as the fact that much of the anti avoidance rules relating to the use of offshore trusts and companies does not apply to Non doms, however we'll look at these in a separate article.

If you think that you could fall within the non dom rules, you should carefully review the structure of your assets, to identify whether you can gain any benefits for offshore assets/income. If necessary, take professional advice.