We saved a client over £10,000 on unnecessary taxes

SMCO recently helped a client, who had Indian and UK income and capital gains, save over £10,000 on their tax liabilities.

In the UK, foreign individuals pay Income Tax and Capital Gains Tax (CGT) depending on their domicile status.

While some taxes can be mitigated by remaining non-domiciled, other charges apply and you’ll often miss out on allowances, reliefs, and exceptions.

Here’s a brief examination of the advantages and disadvantages of domicile status before we explain how we helped our client save considerable amounts of their hard-earned cash.

The benefits of non-domicile status

Remaining non-domiciled in the UK offers several tax benefits, particularly for individuals with substantial income and assets outside the UK – like our client.

Here are the key advantages:

1. Income Tax on foreign income: Non-domiciled residents can choose to pay UK tax only on the foreign income they bring into the UK, rather than on all their worldwide income. This is known as the remittance basis of taxation. If you don’t bring your foreign income into the UK, you won’t pay UK tax on it.
2. CGT benefits: Like Income Tax, non-domiciled individuals are only taxed on foreign capital gains if those gains are remitted to the UK. If the gains remain outside the UK, they are not subject to UK CGT.
3. Inheritance Tax (IHT): Non-domiciled individuals are only subject to UK IHT on their UK assets. Their non-UK assets are exempt, which contrasts with domiciled individuals, who are liable for IHT on their worldwide assets.
4. Access to the remittance basis without charge for short-term residents: Non-domiciled individuals can access the remittance basis without paying the remittance basis charge if they have been UK residents for fewer than seven out of the previous nine tax years. This can significantly reduce their UK tax liability during their initial years in the UK.
5. Protection of overseas assets: By maintaining non-domicile status and not remitting income and gains to the UK, individuals can protect their overseas assets from UK taxation, potentially leading to significant tax savings, especially if those assets are in low-tax jurisdictions.

However, there are also significant benefits to domicile status that should be considered here.

The benefits of domicile status

There are numerous tax-advantageous schemes and incentives that the British Government offers to domicile residents, including:

• Spousal exemption for IHT: Non-domiciles face a limited spousal exemption for Inheritance Tax, capped at £325,000 when transferring assets to a UK-domiciled spouse.
• IHT nil-rate band transfer: Non-domiciles may not fully benefit from transferring an unused IHT nil-rate band to a surviving spouse or civil partner.
• Annual exempt amount for CGT: Opting for the remittance basis of taxation means non-domiciles lose their annual exempt amount for Capital Gains Tax.
• Personal allowance for Income Tax: Non-domiciles choosing the remittance basis and resident in the UK for a certain number of years may have to pay a charge to claim the personal allowance.
• Remittance basis charge: Non-domiciles on the remittance basis face an annual charge after being UK residents for seven or more years, which does not apply to domiciles.
• Tax-advantaged investment schemes: Participation in UK tax-advantaged investment schemes may be less beneficial for non-domiciles, especially if claiming the remittance basis.

As you can see, working out the best option for your personal situation is a bit of a minefield and getting it wrong can mean your tax bill is much larger than you might have expected.

How we helped our client

We began by reviewing their optimal tax position when it comes to their worldwide income and comparing this to the remittance basis charge, to see which was more advantageous.  

We then transferred assets from husband to wife so that only one is liable for the remittance basis charge, rather than both.

As a result, the other can still claim CGT allowances.

Overall, this saved the couple £10,000 in tax for disposals made and has likely optimised their financial position in the long-term.

Having said this, their situation is specific to them, and this is not a one-size-fits-all solution.

As such, you should always consult with a qualified and experienced international tax adviser who can give you tailored advice to your situation.

Please reach out to one of our team if you are worried about your tax liabilities and we can work out whether your non-UK domicile status can save you tax.