Remittance basis of taxation – changes to non-dom status and impact on family law cases
As we anxiously await news of any proposed tax changes in the forthcoming budget, we have seen an increase in enquiries from clients with non-dom tax status in the UK. It is ever more important that we remain alive to this in family law cases. The timing of any remittance (especially if to meet a lump sum payment or other family law settlement) as well as the timing of the final order (formerly called decree absolute) is critical. I set out below some points you, your clients and your referrers need to be alive to.
What is remittance?
In simple terms, foreign funds are remitted to the UK if a taxpayer (or someone with whom they are closely connected) receives, uses or benefits from those funds in the UK.
What is the remittance basis of taxation?
It is a favourable tax regime that allows non-UK domiciled individuals who are UK tax-resident to pay tax on their foreign income or gains (FIG) only when remitted to the UK – i.e. if those FIGs are brought into or enjoyed in the UK.
(This does not alter the tax treatment of individuals’ UK income or gains, which continue to be taxed on an arising basis.)
Background
An individual can be resident in the UK but, for tax purposes, remain domiciled in another country. Whilst they are non-domiciled, they can opt to be taxed on the remittance basis with the result that they can potentially benefit from significant income tax and CGT savings.
NB: Domicile in this context (i.e. - an individual’s tax status) is different to domicile for the purposes of securing jurisdiction in family law proceedings; it is important to emphasise this distinction. It is also different from nationality – a person may hold British citizenship but be domiciled outside the UK.
The remittance regime has for many years been subject to review, with changes in 2022, in the 2024 spring budget and, recently, following the Upper Tribunal decision in Sehgal and Mehan [2024] UKUT 00074.
Previously, a very specific scenario was considered by HMRC involving a divorce financial settlement whereby a remittance-basis user made a payment offshore from their FIG, which was kept offshore by the receiving spouse/partner until after the divorce was finalised. Historically, HMRC accepted that there was no taxable remittance in these circumstances. This position was, however, challenged following the First Tier Tribunal in Seghal and Mehan [2022] TC 8581 (now overturned).
Why is this relevant to family law clients?
In light of the Upper Tribunal decision in Sehgal and Mehan, HMRC has recently confirmed that remittances to the UK made pursuant to and following a divorce in the way described above will still not be taxable remittances, although beware where there are payments to or for children – these may still be remittances.
This is relevant to any Family clients involving UK resident individuals who are non-domiciled for tax purposes.
It is really important that you consider this in any international case where your client is deemed to be non-dom for tax purposes. Timing will be everything!
The government is presently reviewing changes to non-doms. The remittance basis will continue to apply to FIG arising in years before 2025/26 but FIG arising after 5th April 2024 will be treated differently – this means that timely advice will be even more important.
What do I need to do if I think this applies to any of my clients?
Think about any non-dom clients who have assets overseas and the potential tax consequences of funding settlements from FIG.
If you have non-dom clients who may use non-UK assets as part of a settlement, they should get tax advice well before 6th April 2025 – the rules around remittance and taxation of non-doms will be changing then and clients need to be aware of that and possibly plan for it.
This is a highly complex area regarding which you should take advice asap. If you need any help or advice please feel free to reach out to the International Family Law team at Irwin Mitchell.
