U.K. Reviews the Tax Treatment of Foreign Domiciled Individuals

Individuals who are resident in the U.K. but not domiciled there have a privileged status for tax purposes, as the following examples will show.

Income tax

Income from foreign sources is not liable for U.K. taxation unless it is remitted to the country. In addition to exempting investment income this enables employees of foreign firms to structure their affairs to escape tax on duties performed outside the United Kingdom.

Capital gains tax 

Gains realised on the sale of non-United Kingdom assets are not subject to capital gains tax unless remitted.

Inheritance tax

On the death of the owner, non-United Kingdom assets are excluded from any calculation of inheritance tax liability. U.K. assets can also escape the charge if they are placed within an offshore company owned by the foreign domiciled individual.

From time to time there is pressure to reduce or eliminate these benefits and the government is currently engaged on a review of the system. Reviews by previous governments have led to no changes, due largely to the pressures exerted by large financial groups and ship owners based in the City of London, who have threatened to scale down their operations. On this occasion informed opinion is that a limit might be imposed on the number of years an individual could be resident in the United Kingdom and benefit from these concessions. Thereafter he would become fully liable to taxation on the same basis as persons of U.K. domicile.

Planning for change

Persons who may be affected by any change in the rules currently have limited scope for planning against an increase in their income tax liabilities but they have opportunities, not available to U.K. domiciled persons, to protect their non-U.K. assets from inheritance tax and, to an extent from capital gains tax. This can be achieved by the simple expedient of placing them within an offshore trust before the rules change. It is a course of action which should also be considered by residents of other countries who intend, at some time in the future, to become long-term residents of the United Kingdom.

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