Skip Links
Baker Tilly
United Kingdom
Follow us on Twitter Follow us on LinkedIn

Taxation of non-UK domiciled partners

Sarah Turgoose
Associate Director

Contact me

T: 01483 307000
F: 01483 569281

Related links

The well-publicised introduction of new legislation for non-UK domiciled individuals seems set to have a significant but unintended impact on the taxation of partners who are resident in the UK but who are non-UK domiciled.

The change potentially affects the taxation of overseas profits receivable from 6 April 2008.

  • The issue

    Non-UK domiciled partners are subject to UK tax on their allocation of profits arising in the UK but are only taxable in the UK on their overseas profits which are remitted. If the partner has an overseas account which receives both elements of his profit share HMRC's practice in the years up to 5 April 2008 was to accept that the UK profits were treated as being remitted to the UK first, with any balance of the total remittances relating to overseas profits. This is best explained by way of an example:

    • Example 1 – HMRC Practice up to 5 April 2008
      UK profit share - £40,000
      Remittance to the UK - £50,000
      Taxable on £40,000 of UK income
      Taxable on £10,000 of overseas income
      Total UK taxable income £50,000

    The changes to the taxation of non-UK domiciled individuals introduced new rules for remittances from "mixed accounts". A "mixed account" is an overseas account which has a mixture of sources of income and gains and would include a partner's account which has a mixture of UK and non-UK source income, as described above. The new legislation sets out rules for taxing remittances from a mixed account. These rules override previous HMRC practice with effect from 6 April 2008.

    Under the new rules, where a remittance is made to the UK from a mixed account, the foreign income will be taxed before UK source income. This could have the effect of significantly increasing a partner's UK tax liability. Using the same figures this is shown in example 2.

    • Example 2 – Taxation of a mixed account from 6 April 2008
      UK profit share - £40,000
      Remittance to the UK - £50,000
      Taxable on £40,000 of UK income on an arising basis
      Taxable on £50,000 of overseas income based on remittances to the UK 
      Total UK taxable income £90,000

    This issue will only arise where the UK and overseas profits are paid into a mixed account and a subsequent remittance is made from that account. The effect is that the UK tax liability for a non-UK domiciled partner may increase significantly from 6 April 2008 unless steps are taken to counter this.

    In either example, if any tax has been paid overseas in relation to the overseas profits, it may be possible to claim a tax credit against the UK tax due.

    We understand that the new rules were not intended to have these consequences so it is possible that guidance will be given by HMRC to reinstate the former position. However, until then, non-UK domiciled partners should consider changing their banking arrangements so that this unintended and unwelcome tax increase does not arise.

  • A solution

    A solution is to ensure that the UK and overseas profits are paid into two separate bank accounts outside the UK. The partner should then first use the account with the UK partnership income to fund his UK living expenses, as this will be subject to tax irrespective of remittance. Thereafter, any additional monies which are required in the UK can be remitted from the overseas bank account which will be taxable. The accounts will not be regarded as 'mixed' funds, as they are separated. If successful, the UK tax position will be:

    • Example 3 – Separated foreign and UK accounts
      UK profit share - £40,000
      Remittance to the UK - £50,000
      Taxable on £40,000 of UK income which is remitted from 'UK' account first
      Taxable on £10,000 of overseas income which is remitted last from overseas account
      Total UK taxable income £50,000

    It may not always be feasible to separately identify the partner's UK- and foreign-source income but, if it is, it should be possible to avoid the consequences of the new legislation.

    Careful consideration will need to be given to the amount of UK partnership income to be sent to the 'UK' account as it is likely that the partner's share of UK profits will not be agreed until after the year end but monthly draws will have been made during the year. It is our understanding that, if the partner remits first from the 'UK' account, and the UK income is computed on a consistent and reasonable basis, then HMRC will accept this approach.

    Circumstances will vary so it is vital that partners who are UK resident but non-UK domiciled take advice now to ensure that their remittances to the UK are structured correctly. Without careful planning they could end up with a much higher UK tax liability than expected.