Advantages of the UK’s Favorable Tax Regime

Release time：

2024-10-10

Many of our clients are drawn to the UK for its myriad advantages—whether it’s the country’s economic and political stability, world-renowned educational institutions, or access to one of the most prominent financial markets. Additionally, factors such as its favorable time zone, the global prevalence of English, and a highly respected legal framework make the UK an attractive destination for both individuals and businesses.

Furthermore, the UK offers significant tax benefits for those who reside in the country without becoming domiciled. Non-domiciled residents are only taxed on their UK-sourced income, while foreign income remains untaxed as long as it is not remitted to the UK.

For investors, there’s an added advantage: before becoming a UK resident, foreign income and gains can be brought into the UK without incurring tax liabilities.

The UK also offers favorable inheritance tax relief and other tax exemptions related to business investments—benefits that are not available to long-term UK residents.

If you are a foreign national residing in the UK, you are typically classified as non-domiciled for tax purposes. While you may be considered a tax resident, your domicile usually remains in your country of origin.

Your UK tax residency status can change annually, depending on your circumstances. Importantly, not all non-domiciled residents have the same tax obligations (for example, U.S. citizens residing in the UK are subject to different tax requirements).

UK tax law is especially favorable for individuals who are UK tax residents but not domiciled. These individuals can choose between two taxation methods: global taxation or the remittance basis.

The decision hinges on when an individual’s worldwide income and gains should be subject to UK taxation.

Under the remittance basis of taxation, only UK-sourced income and capital gains are taxed in the UK. Income and gains from abroad are not taxed if they remain outside the UK.

How Does the Remittance Basis of Taxation Work?

For the first six years of residency, the remittance basis of taxation can be applied without charge. However, after this period, an annual fee, known as the remittance basis charge, applies for continued use of this benefit:

If your unremitted foreign income and gains are less than £2,000 at the end of the tax year (April 5), the remittance basis automatically applies without the need for a formal claim, and no charge is incurred, regardless of how long you have lived in the UK.

If unremitted foreign income and gains exceed £2,000, the following charges apply:

If you have been a UK resident for fewer than 7 of the past 9 years, you can use the remittance basis without incurring the remittance basis charge.

If you have been a UK resident for at least 7 of the past 9 years, you must pay an annual charge of £30,000 to continue benefiting from the remittance basis.

If you have been a UK resident for at least 12 of the past 14 years, the annual charge increases to £60,000.

If you have been a UK resident for 17 of the past 20 years, the remittance basis charge rises to £90,000 annually (from April 6, 2017).

After 15 years of residency within the past 20 years, you are no longer eligible for the remittance basis and will be taxed on your worldwide income and capital gains in the UK.

In any scenario, individuals using the remittance basis will forfeit their UK personal tax allowance and capital gains tax exemption. Since the remittance basis is not applied automatically, you must file a self-assessment tax return to claim it. Otherwise, HMRC will tax you on your global income.

Who Is Considered Domiciled?

If an individual has been a UK tax resident for 15 of the past 20 tax years, they are deemed domiciled in the UK. This means the favorable non-domiciled tax regime will no longer apply indefinitely.

Please note that the information provided here is for general reference and does not constitute legal advice. For any specific legal questions or concerns, it is recommended to seek professional consultation.