Everyone is born with a domicile. The domicile of an individual at birth is determined by his father's domicile. Surprisingly, the mother's domicile is only taken into account if a child is born outside of marriage.
Non-domiciled individuals are UK residents who have their permanent home outside the country and may not be required to pay UK tax on foreign income or capital gains. The exemption dates back to 1799, when the income tax was first implemented. It was designed to safeguard colonial investments by allowing UK residents to be taxed only on money brought into the country.
A UK resident can be non-domiciled if their domicile is considered to be abroad. Non-doms must usually self-report their non-dom status to HM Revenue & Customs by checking a box on their tax return. People have the option of not claiming their non-dom status in any given year. If this is the case, they will be required to pay UK tax on their worldwide wealth.
However, some aspects of the non-dom legislation are misleading. The legislation can be used, or abused, by foreigners or British citizens to avoid paying taxes entirely. While they are required to pay tax in the countries where they earn their income, the fact that they live in the UK makes it easier for them to arrange their affairs and pay little or no tax at all.
As a result, many of the wealthiest families in the UK do not contribute to direct taxation in the UK. According to the claim, the system is still useful because these people contribute indirectly by employing a small army of servants and service providers who pay income tax. Non-doms may also be required to pay VAT on expensive goods and services purchased in the UK.
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UK Domicile vs. UK Residents
In general, your domicile is the permanent location where you live, whereas your country of domicile is the permanent country where you live. In essence, domicile is a legal construct that determines where you vote for the government, file lawsuits, pay taxes, claim benefits, and owe the government.
If you live in the UK, you are usually taxed on an originating basis, which means that all of your worldwide income and gains are taxable in the UK. As a result, even if your foreign income and gains have already been taxed in another country, they will still be taxable in the UK, and you must declare all of your foreign income and gains on your tax return if the UK and the country of residence have a double tax treaty.
A residence is a home you intend to live in for a limited time, whereas a domicile is a home you intend to live in indefinitely. Your residence can be anywhere you own property or live for a set period of time. However, your domicile can only be the one location where you intend to make your permanent home and stay indefinitely. As a result, you can have multiple residences, but only one domicile in one planned location.
Non-Dom Status Legislation Reform
In 2015, the system was reformed and became more complicated. Non-dominance is now limited to 15 years. The reforms significantly reduced the number of people claiming non-domestic status. Only the very wealthy do so anymore. Many people leave the UK after 15 years for five years, then return and claim another 15 years of non-domicile status.
To maintain non-dom status, someone must have lived in the UK for seven of the previous nine tax years and pay a fee of £30,000. The fee is £60,000 after 12 of the previous 14 tax years. And after 15 years in the UK, a person becomes automatically domiciled.
A Case Study
One of our clients in Dubai recently asked us if he could obtain non-dom status so that he could transfer his UK-regulated pension scheme into an offshore bond as instructed by his financial advisor. We are convinced that this was completely incorrect. Leaving the regulated UK pension scheme, which is protected by the FCA and guaranteed by the TPO Ombudsman, and investing in an unregulated offshore bond would result in pension scams.
The reason for this is that when you leave a UK-regulated pension scheme that is highly protected by consumer protection, investing it in an offshore bond where your money is not as well protected as it was in the UK pension scheme will result in high commissions, risky investments, and, in the worst-case scenario, you will most likely lose your money.
The other reason is that obtaining non-dom status is extremely difficult and complicated. It is not as simple as declaring that you were born outside of the United Kingdom and obtaining non-dom status. In reality, 70.000 people apply for non-dom status in the UK, including the wealthiest, who have lawyers and accountants on their side, and not all of them are successful.
Actually, a very interesting statistic that we saw in the financial times was that only about 2000 people have managed to maintain their non-dom status for a period of seven years or more, which is only about two thousand people out of the entire population of the United Kingdom.
So, if you think you can just magically become a non-dom and avoid all sorts of tax on your pension pot in the UK; if you retire there and it'll be fine to have it invested in offshore bonds and you won't have to pay any income from those offshore bonds in your retirement, you're mistaken. We believe it is wishful thinking.
Our Advice
A complicated set of requirements must be satisfied in order to apply for non-dom status, and even if you are granted the status, the cost is high. We advise you to be even more cautious with the advice of any independent financial advisor who suggests that you apply for non-domicile status in order to transfer your UK pension scheme to an offshore bond.
The best course of action is to consult both your tax advisor and an independent financial advisor. Simply put, if something seems too good to be true, it probably is. Do not follow the trend.
Cameron James – Your Trustworthy Pension Transfer Specialist
Cameron James Expat Financial Planning is the preferred independent financial adviser for final salary pension and SIPP transfers. With over ten years of experience transferring pensions, Cameron James is now servicing clients in 26 countries.
We have the qualifications and technical knowledge required to help you transfer to an international SIPP as an expat and a US resident. Our mission is to bring regulated and transparent advice to our clients. As such, our clients know how much their advice will cost in advance, with no hidden fees.
Cameron James Expat Financial Planning has a sophisticated cash flow management system in place. Our senior management team has a decade of experience in serving expats and is committed to serving the requirements of expats for decades to come.
Transferring a Final Salary Pension or Defined Contribution Pension into a SIPP pension scheme for expats is not a simple decision. Before deciding, many details and procedures must be thoroughly understood. Without this knowledge, the benefit will turn into a potential loss.
It is essential to seek competent advice from a qualified financial adviser to verify that your profile matches the suitable options and to ensure that your choice meets the UK and US regulations. Meet one of our dedicated advisers to get a full understanding of SIPPs.